<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FEBRUARY 4, 1998
REGISTRATION NO. 333-41129
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
PHARMAPRINT INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 2834 33-0640125
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation) Number)
</TABLE>
4 PARK PLAZA, SUITE 1900, IRVINE, CALIFORNIA 92614
(714) 794-7778
(Address and Telephone Number of Principal Executive Offices and Principal Place
of Business)
JAMES R. WODACH,
CHIEF FINANCIAL OFFICER
4 PARK PLAZA, SUITE 1900,
IRVINE, CALIFORNIA 92614 (714) 794-7778
(Name, Address and Telephone Number of Agent for Service)
------------------------
WITH COPIES TO:
Barry J. Siegel Brian W. Copple
Cynthia Wong Monte M. Brem
Klehr, Harrison, Harvey, Branzburg & Gibson, Dunn & Crutcher LLP
Ellers LLP
1401 Walnut Street 4 Park Plaza, Suite 1700
Philadelphia, PA 19102 Irvine, California 92614
(215) 568-6060 (714) 451-3800
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE FOLLOWING EFFECTIVENESS OF THIS REGISTRATION STATEMENT.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
CROSS-REFERENCE SHEET: INFORMATION REQUIRED IN PROSPECTUS
<TABLE>
<CAPTION>
ITEM AND CAPTION IN FORM SB-2 CAPTION OR LOCATION IN PROSPECTUS
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<C> <S> <C>
1. Front of Registration Statement and Outside Front Front of Registration Statement; Outside Front Cover
Cover of Prospectus Page
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages
Prospectus
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price N/A
6. Dilution Dilution
7. Selling Security Holders Principal and Selling Stockholders
8. Plan of Distribution Outside Front Cover Page; Underwriting
9. Legal Proceedings Business--Legal Proceedings
10. Directors, Executive Officers, Promoters and Control Management
Persons
11. Security Ownership of Certain Beneficial Owners and Principal and Selling Stockholders; Certain
Management Transactions
12. Description of Securities Outside Front Cover Page; Description of Capital
Stock; Price Range of Common Stock
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification Liabilities Management--Limitation of Liability and
For Securities Act Indemnification Matters
15. Organization Within The Last Five Years Certain Transactions
16. Description of Business Business
17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis of Financial
Operation Condition and Results of Operations
18. Description of Property Business--Facilities
19. Certain Relationships and Related Transactions Certain Transactions
20. Market for Common Equity and Related Stockholder Outside Front Cover Page; Risk Factors; Price Range
Matters of Common Stock
21. Executive Compensation Executive Compensation
22. Financial Statements Financial Statements
23. Changes In and Disagreements with Accountants on N/A
Accounting and Financial Disclosures
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 12, 1998
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
1,500,000 SHARES
[LOGO]
COMMON STOCK
--------------
All of the shares of common stock ("Common Stock") offered hereby (the
"Offering") are being sold by PharmaPrint Inc. (the "Company" or "PharmaPrint").
The Common Stock is listed on the Nasdaq National Market under the symbol
"PPRT." On January 8, 1998, the last reported sale price of the Common Stock on
the Nasdaq National Market was $10.75 per share. See "Price Range of Common
Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
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Per Share................... $ $ $
Total(3).................... $ $ $
</TABLE>
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $475,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 225,000 shares of Common Stock, at the Price to Public per
share, less the Underwriting Discount, solely for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discount and Proceeds to Company
will be $ , $ and $ , respectively. See "Underwriting."
-------------------
The shares of Common Stock are offered severally by the Underwriters when,
as and if delivered to and accepted by them, subject to their right to withdraw,
cancel or reject orders in whole or part and subject to certain other
conditions. It is expected that delivery of certificates representing the shares
will be made against payment on or about February , 1998 at the office of CIBC
Oppenheimer Corp., CIBC Oppenheimer Tower, One World Financial Center, New York,
New York 10281.
-------------------
[LOGO]
The date of this Prospectus is , 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of Section 13(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the SEC Regional Offices and can be reviewed through
the Commission's Electric Data Gathering Analysis and Retrieval System
("EDGAR"), which is publicly available through the Commission's web site
(http://www.sec.gov). The Company's Common Stock is traded on the Nasdaq
National Market. Reports and other information concerning the Company can also
be inspected at Nasdaq.
The Company has filed with the Commission a Registration Statement including
related exhibits and schedules (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to such Registration Statement. Statements contained
in this Prospectus as to the contents of any contract or other document referred
to are not necessarily complete and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement, including the exhibits and
schedules thereto, may be inspected without charge at the Commission's public
reference facilities at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, at the Pacific Regional Office located at 5670 Wilshire
Boulevard, 11th Floor, Los Angeles, California 90036-3648, the New York Regional
Office located at Seven World Trade Center, 13th Floor, New York, New York 10048
and the Chicago Regional Office located at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 ("SEC Regional Offices"),
and copies of all or any part thereof may be obtained at prescribed rates from
the Public Reference Section of the Commission and reviewed through EDGAR.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMPANY'S COMMON
STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS AND PURCHASES, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS (AND NOTES THERETO) APPEARING ELSEWHERE
IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED HEREIN, INFORMATION IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. AN
INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE
OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE INFORMATION
PROVIDED UNDER "RISK FACTORS."
THE COMPANY
PharmaPrint Inc. ("PharmaPrint" or the "Company") is applying its
proprietary development and manufacturing process technologies (the "PharmaPrint
Process") to develop pharmaceutical-grade dietary supplement products and
pharmaceuticals from natural plant extracts. The Company is focusing its
development efforts on certain plants and plant extracts that are widely used
throughout the United States and Europe to treat a variety of diseases and
physical conditions. The PharmaPrint Process enables the Company to identify and
quantify the active molecules (referred to as "bioactives") within plant sources
that are believed to provide therapeutic or other health benefits and to produce
dietary supplements and pharmaceuticals having consistent batch-to-batch
quantities and ratios of these bioactives. The Company believes that its dietary
supplement products will deliver more consistent results than currently
available dietary supplement products and that its pharmaceutical products may
qualify for regulatory approval.
The Company believes that its PharmaPrint Process technology represents a
new paradigm in the development of therapeutic products from botanical sources.
Traditional drug development has focused on identifying, isolating and
synthesizing single molecules from plant and other sources that demonstrate
activity in certain IN VITRO assays. However, most single molecules derived from
plant sources cannot be developed into viable drugs. The Company's core
technologies were developed based on empirical data suggesting that the health
benefits and safe usage of certain plant-derived therapeutics might be the
result of the natural combination of multiple molecules found in the plant
extract and that single molecules, in isolation, may not replicate the natural
plant's effectiveness.
The worldwide market for multi-molecule, plant-derived products is
substantial. According to NUTRITION BUSINESS JOURNAL, in 1996 approximately $3
billion was spent in the United States for non-prescription, plant-derived
dietary supplements, with sales, according to the BOSTON GLOBE, having increased
over 20% annually in the last few years. In addition, according to THE WALL
STREET JOURNAL EUROPE, approximately $6 billion was spent in Europe for
prescription and over-the-counter ("OTC") multi-molecule, plant-derived
products.
The Company has implemented a dual commercialization strategy for its
PharmaPrint Process technology. The first element of this strategy entails the
development of consistent, pharmaceutical-grade dietary supplement products. In
the United States, dietary supplements are considered food products under the
Dietary Supplement Health and Education Act of 1994 ("DSHEA") and, as such, are
not regulated as drugs by the United States Food and Drug Administration (the
"FDA") and do not require FDA approval prior to commercialization. The Company
has commenced development of 12 of the most commonly used dietary supplements
(derived from agnus castus, bilberry, black cohosh, echinacea, garlic, ginger,
ginkgo biloba, ginseng, milk thistle, saw palmetto, St. John's wort and
valerian).
In October 1997 the Company entered into several agreements (the "AHP
Agreements") with American Home Products Corporation ("AHP") whereby the Company
will apply the PharmaPrint Process to produce a line of pharmaceutical-grade
dietary supplement products to be marketed by AHP under its Centrum brand name
(the "AHP Products"). In exchange for the exclusive right to use the PharmaPrint
Process in the production of dietary supplements, AHP paid the Company $2.5
million as an up-front licensing fee and is required to pay additional fees of
$500,000 upon each of (i) the issuance of a patent covering the PharmaPrint
Process and (ii) receipt and acceptance by AHP of the initial AHP Products in
sufficient time to permit AHP to meet its proposed launch date. AHP has agreed,
in the first two years following shipment by AHP of commercial quantities of the
initial AHP Products, to spend annually at least the lesser of $20 million or an
amount equal to 50% of net sales of the AHP Products in
3
<PAGE>
advertising and other marketing expenditures. AHP has also agreed to purchase
the AHP Products from the Company under a Supply Agreement at specified prices.
In addition, if the Company succeeds in securing a patent containing a claim or
claims comprising the PharmaPrint Process applied generally or on a
product-by-product basis, AHP will pay royalties to the Company on net sales of
such patented AHP products of 4% in the first year and 6% thereafter. AHP plans
to commence marketing seven of the Company's dietary supplement products under
development in 1998. AHP and the Company will examine from time to time the
opportunity to increase or modify this product line.
The second element of the Company's strategy is to apply the PharmaPrint
Process to the development of FDA-approvable pharmaceuticals from natural plant
sources. PharmaPrint is focusing its pharmaceutical development efforts
initially on certain plants and plant extracts (such as saw palmetto, St. John's
wort and ginkgo biloba, among others) that have shown indications of clinical
effectiveness in treating a variety of diseases and physical conditions.
Although these multi-molecule, plant-derived products are widely sold in many
European countries on a prescription or OTC basis, they currently are available
only as dietary supplements in the United States. The Company believes that
these products have not been approved as pharmaceuticals under FDA guidelines
primarily due to the difficulties of identifying the bioactives and
manufacturing the compounds to FDA standards.
PharmaPrint believes that the PharmaPrint Process will, for the first time,
make it feasible to develop multi-molecule, plant-derived drug candidates with
sufficient quality and consistency of bioactives to potentially qualify for FDA
approval. Because of the well-documented history of safe usage of products
derived from the same plant sources as the Company's drug candidates, the
Company believes that, in certain cases, the FDA may allow the Company to
commence clinical trials at the Phase II stage while concurrently performing
toxicology studies. The Company received such FDA clearance for its initial
pharmaceutical product candidate, PPRT-321. The Company also plans to use its
United States clinical data to apply for regulatory approvals to market its
products in the prescription and OTC markets in Europe and other international
markets.
In September 1997, the Company commenced Phase II clinical trials in four
medical centers in the United States for PPRT-321, a saw palmetto-derived drug
that is being developed for the treatment of symptoms associated with benign
prostatic hyperplasia ("BPH"). In early 1998, the Company intends to file an
investigational new drug ("IND") application for PPRT-152, its anti-depressant
drug candidate derived from St. John's wort. In addition, the Company is
applying the PharmaPrint Process to the development of pharmaceutical versions
of four other plant-derived drug candidates that have long histories of human
use and indications of effectiveness: ginkgo biloba (to treat cognitive
disorders), valerian (to treat insomnia), black cohosh (to reduce certain
post-menopausal symptoms) and agnus castus (to reduce premenstrual symptoms).
The Company is in discussions with several major pharmaceutical companies for
the development and distribution of the Company's potential pharmaceutical
products, including AHP, to whom the Company has granted an option to develop
with the Company potential FDA regulated pharmaceutical products, including
products for sale in the OTC market.
The Company has filed with the United States Patent and Trademark Office
(the "PTO") applications for a broad process patent covering a method for making
pharmaceutical-grade botanicals that incorporates the steps that make up the
PharmaPrint Process, as well as additional applications covering the application
of this method to the manufacture of 11 specific botanical compositions.
The Company's principal executive offices are located at 4 Park Plaza, Suite
1900, Irvine, CA 92614 and its telephone number is (714) 794-7778.
PHARMAPRINT-TM- AND THE THREE-LEAF LOGO ARE TRADEMARKS OF THE COMPANY.
CENTRUM-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK OF AHP. THIS PROSPECTUS
ALSO INCLUDES TRADEMARKS OF COMPANIES OTHER THAN THE COMPANY AND AHP.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company......................... 1,500,000 shares
Common Stock outstanding after the
Offering........................ 12,553,684 shares(1)
Use of proceeds................... To fund formulation, toxicology and clinical testing of
the Company's pharmaceutical products, formulation and
manufacturing of the AHP Products pursuant to the AHP
Agreements, potential acquisitions of research and
manufacturing facilities and working capital and general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol..... PPRT
</TABLE>
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(1) Excludes (i) 2,010,378 shares reserved for issuance upon exercise of
outstanding options granted under the Company's 1995 Stock Option Plan, at a
weighted average exercise price of $5.23 per share and (ii) 375,000 shares
issuable upon exercise of warrants, including warrants issued to the
representative of the Underwriters (the "Representative's Warrants"). See
"Description of Capital Stock" and "Underwriting."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION SIX MONTHS ENDED SEPTEMBER
(SEPTEMBER 15, YEAR ENDED MARCH 31, 30,
1994) TO MARCH ----------------------------- ----------------------------
31, 1995 1996 1997 1996 1997
-------------- ------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................ $ -- $ -- $ -- $ -- $ --
Expenses:
Research and development
expenses.......................... 378,456 386,878 2,980,064 786,495 2,717,402
General and administrative
expenses.......................... 105,552 653,557 2,919,351 1,640,497 1,863,712
Stock compensation expense........ -- 303,750 5,333,437 4,585,000 3,623,540
-------------- ------------- -------------- ------------- -------------
Loss from operations................ (484,008) (1,344,185) (11,232,852) (7,011,992) (8,204,654)
-------------- ------------- -------------- ------------- -------------
Net loss............................ $ (484,008) $ (1,344,185) $ (11,232,852) $ (7,011,992) $ (8,204,654)
-------------- ------------- -------------- ------------- -------------
-------------- ------------- -------------- ------------- -------------
Net loss per share.................. $ (0.06) $ (0.16) $ (1.10) $ (0.79) $ (0.73)
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-------------- ------------- -------------- ------------- -------------
Weighted average common and common
share equivalents outstanding..... 7,635,474 8,297,103 10,193,131 8,893,702 11,223,072
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------
AS
ACTUAL ADJUSTED(1)
------------ -------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 3,281,188 $17,802,438
Working capital..................................................................... 2,719,293 17,240,543
Total assets........................................................................ 4,052,964 18,574,214
Total liabilities................................................................... 891,754 891,754
Stockholders' equity................................................................ 3,161,210 17,682,460
</TABLE>
- ------------------------
(1) As adjusted to give effect to the sale of the 1,500,000 shares of Common
Stock offered hereby and the application of the net proceeds therefrom at an
assumed public offering price of $10.75 per share. See "Use of Proceeds" and
"Capitalization."
6
<PAGE>
RISK FACTORS
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN EVALUATING
THE COMPANY AND ITS BUSINESS PROSPECTS AND AN INVESTMENT IN THE SHARES OF COMMON
STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS,
INCLUDING, BUT NOT LIMITED TO, STATEMENTS CONCERNING THE APPLICATION OF THE
PHARMAPRINT PROCESS, THE COMMENCEMENT AND COMPLETION OF TOXICOLOGY STUDIES AND
CLINICAL TRIALS, THE TIMING OF PLANNED REGULATORY FILINGS, PLANNED ACTIVITIES OF
EXISTING AND POTENTIAL COLLABORATIVE PARTNERS, THE COMPANY'S STRATEGIC PLANS,
THE SCOPE OF THE COMPANY'S PATENT COVERAGE, ANTICIPATED EXPENDITURES, THE NEED
FOR ADDITIONAL FUNDS AND OTHER EVENTS AND CIRCUMSTANCES DESCRIBED IN TERMS OF
THE COMPANY'S EXPECTATIONS OR INTENTIONS. ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS AS A RESULT OF VARIOUS
FACTORS, INCLUDING, BUT NOT LIMITED TO, THE UNCERTAINTY OF PATENT ISSUANCE AND
PROTECTION, MARKET AND REGULATORY ACCEPTANCE OF THE COMPANY'S TECHNOLOGY,
PRODUCT REVENUE AND THE OTHER RISKS DISCUSSED UNDER "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS," AS WELL AS IN THIS PROSPECTUS GENERALLY.
EARLY STAGE OF PRODUCT DEVELOPMENT; TECHNOLOGICAL UNCERTAINTIES
The Company is a development stage company and has a limited operating
history. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered in establishing a business in
the consumer products and pharmaceutical industries, which are characterized by
a large number of market entrants, intense competition and a high failure rate.
To date, the Company has been engaged primarily in research and development
activities and has generated no revenue from product sales. To achieve
profitable operations, the Company, alone or with others, must successfully
develop, introduce and market products. No assurance can be given that the
Company's product development efforts will be successfully completed, that
required regulatory approvals will be obtained, or that any product, if
introduced, will be successfully marketed or will achieve customer acceptance.
The Company currently has no dietary supplement or pharmaceutical products
available for sale and its research and development programs for its
pharmaceutical products are at an early stage. There can be no assurance that
the Company's research will lead to the development of any commercially feasible
product. Research and development activities, by their nature, preclude
definitive statements as to the time required and costs involved in reaching
certain objectives. Actual research and development costs could exceed budgeted
amounts and estimated time frames may require extension. Cost overruns due to
unanticipated clinical or regulatory delays or demands, unexpected adverse side
effects, insufficient therapeutic efficacy or competitive or technological
developments would prevent or substantially deter development efforts and
ultimately could have a material adverse effect on the Company. The Company's
existing pharmaceutical product candidates, and any potential additional
pharmaceutical products that may be developed, require significant additional
research and development, including toxicology and clinical testing, regulatory
approval and commitments of resources prior to commercialization. There can be
no assurance that any such potential pharmaceutical products will be
successfully developed or capable of being produced in commercial quantities at
acceptable costs, or that any pharmaceutical product will prove to be safe and
effective in clinical trials or otherwise, or meet applicable regulatory
standards. Furthermore, clinical trials of the Company's initial pharmaceutical
products may be viewed as a test of the Company's PharmaPrint Process. If these
clinical trials encounter problems or are otherwise unsuccessful, the
applicability of the PharmaPrint Process to other drug development candidates
may be uncertain.
DEPENDENCE ON AHP
The Company granted AHP an exclusive license to market and sell in the
United States, Canada and Mexico (and any other countries specified by AHP
within three years of the initial product launch) the AHP Products developed or
to be developed by the Company as dietary supplements using the
7
<PAGE>
PharmaPrint Process. The AHP Agreements restrict sales by the Company of dietary
supplements other than through AHP, and the Company is relying upon sales of its
dietary supplement products to AHP and, through AHP, to consumers, under the AHP
Agreements, as its only sources of product revenues in the near future. AHP has
informed the Company that it intends to market the AHP Products under its
Centrum brand name, either as Centrum-branded products or with a separate brand
identity associated with Centrum. Prior to the initial launch date of the first
AHP Product, the AHP Agreements are terminable by AHP in its sole discretion
upon thirty days notice. Subsequent to such launch date, AHP can terminate the
AHP Agreements with respect to specific products in its sole discretion upon
ninety days notice and can terminate the AHP Agreements in their entirety in its
sole discretion with one year's notice. AHP could elect to terminate the AHP
Agreements for many reasons, including shifts in its strategic focus, poor
market reaction to Centrum-branded dietary supplements, lack of patent
protection for the PharmaPrint Process or a determination to pursue alternative
methods of producing dietary supplements. If the AHP Agreements are terminated
in whole or part, the Company may not be able to enter into comparable
agreements for the distribution and sale of its products or establish its own
marketing and sales force to market potential products, which events could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company is obligated to conduct, at its own expense, the research and
development and regulatory work necessary to produce the AHP Products for sale
to AHP. This will require significant expenditures by the Company which may not
be recovered if AHP terminates the AHP Agreements in whole or part or sales of
AHP Products are lower than anticipated. The prices at which the Company will
supply the AHP Products are fixed in the first two years following product
launch, therefore increases in material or production costs will reduce the
profitability to the Company of the AHP supply arrangements.
AHP is not obligated to pay royalties to the Company on sales of any AHP
Products that are not covered by a patent containing a claim or claims
comprising the PharmaPrint Process applied generally or on a product-by-product
basis. The Company does not currently have any such patents for any of its
products, and there can be no assurance that patents will be obtained for any of
the AHP Products. The Company's business, financial condition and results of
operations will be materially adversely affected if AHP does not make such
royalty payments to the Company.
The AHP Agreements limit AHP's obligation to provide marketing support for
the AHP Products during the first two years after the initial launch date of the
first AHP Product to an annual amount of the lesser of fifty percent of net
sales of the AHP Products or $20,000,000. Accordingly, poor initial sales could
result in the marketing support required of AHP being significantly less than
$20,000,000 per year. While AHP is obligated to devote to the AHP Products the
efforts and resources it normally uses to market non-prescription products of
its own discovery and of similar market potential at a similar stage of product
life, after the first two years following the initial launch date AHP is not
required to provide any specific monetary level of marketing support for the AHP
Products. If AHP does not dedicate sufficient funds to marketing the AHP
Products, sales of these products and the Company's business, financial
condition and results of operations may be adversely affected. Additionally, the
Company's sole remedy if AHP fails to meet its minimum monetary marketing
support commitments, provided that AHP has not otherwise breached its
obligations under the AHP Agreements (including its obligation to market the AHP
Products consistent with the efforts it uses to market similar products) is to
sell its dietary supplement products under a national or regional brand through
one additional party.
AHP has made an initial payment of $2,500,000 to the Company. However, if
(i) AHP reasonably concludes, prior to the first commercial sale of an AHP
Product, that a license under a third party's patent is required in order to
sell the AHP Products and (ii) AHP and the Company are unable to obtain such a
license, then the Company must return all or a portion of such payment to AHP
(as well as two other milestone payments, if AHP makes such payments). If a
license to a third party's patent is required and obtained, any payments and
royalties that are paid by AHP for the license will be deducted from any royalty
payments or other payments due to the Company under the AHP Agreements. There
can be no
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assurance that the Company will not be required to obtain a license of a third
party's patent in order to sell any single or all of the AHP Products.
Reimbursement of any payment made by AHP to the Company or a reduction in the
amount of the royalty payments could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company expects to enter into collaborative agreements with other
partners for the development and marketing of products not subject to the AHP
Agreements, although AHP has an option to develop with the Company FDA regulated
pharmaceutical products, including products for sale in the OTC market. The
commercial value of the AHP Products and any other products, even if
successfully developed, will depend on the ability of AHP and any other partner
to market and commercialize such products. There can be no assurance that the
Company's collaboration with AHP or any other potential partner will result in
product revenues or profits. In addition, there can be no assurance that AHP or
any such corporate partner or licensee will not pursue alternative technologies
or develop alternative therapeutics, either on its own or in collaboration with
others, targeted at the same markets or diseases as those developed and
commercialized by the Company. This risk may increase if the Company is not
successful in obtaining and maintaining patent protection for the PharmaPrint
Process.
UNCERTAINTIES RELATED TO THE PHARMAPRINT PROCESS
The Company believes its competitive advantage is its unique ability,
through application of the PharmaPrint Process, to assess and standardize the
bioactive composition and potency of plant-derived dietary supplements and
pharmaceuticals. There can be no assurance, however, that consumers in the
dietary supplement market will value this standardization highly, particularly
in light of the fact that these products cannot be marketed through any claims
for the treatment or prevention of disease. In addition, the PharmaPrint Process
itself does not assure efficacy of the Company's products and claims of efficacy
can be made only after successful clinical trials, which will not be conducted
with respect to the Company's dietary supplement products. Accordingly, there
can be no assurance that the Company's dietary supplement products will compete
effectively or achieve commercial success.
In the pharmaceutical market, the Company is dependent upon regulatory
approval for its plant-derived multi-molecule drug candidates. The Company does
not believe that the FDA and other regulatory authorities have ever approved
multi-molecule, botanical pharmaceuticals, and there can be no assurance that
regulators will begin approving these compounds in general, or accept the
PharmaPrint Process as an appropriate method of standardizing botanical
compounds for clinical testing and approval of the Company's drug candidates in
particular. Unavailability of regulatory review and approval would prevent the
Company from achieving its pharmaceutical development plans, in which case the
Company's only potential business would be dietary supplements.
While the Company has successfully applied the PharmaPrint Process to
produce multi-molecule compounds with batch-to-batch consistency in test
production and for development purposes, it has not yet commenced
commercial-scale production. Accordingly, there is a risk that the Company will
encounter unexpected difficulties in applying the PharmaPrint Process to
manufacture on a commercial-scale. Such difficulties could slow production or
increase the Company's costs.
DEPENDENCE ON PATENTS AND OTHER PROPRIETARY RIGHTS; UNCERTAINTY OF PATENT
PROTECTION AND
PROPRIETARY RIGHTS
The Company's success will depend to a significant degree on its ability to
obtain and maintain patent protection for its technologies and dietary
supplement and pharmaceutical products, preserve its trade secrets, and operate
without infringing on the proprietary rights of third parties. The Company plans
to achieve a competitive advantage as the only provider of botanical dietary
supplements and multi-molecule pharmaceuticals that can market its products on
the basis of consistent composition, the presence of at least one bioactive and
proven bioactivity. This depends upon its ability to obtain a patent covering
the
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PharmaPrint Process that is broad enough to prevent competitors from making such
claims. The Company has filed with the PTO applications for a broad process
patent covering a method for making pharmaceutical-grade botanicals that
incorporates the steps that make up the PharmaPrint Process, as well as
additional patent applications covering the application of this method to the
manufacture of 11 specific botanical compositions. The Company intends to file
additional patent applications as it develops additional products or enhances
its technologies. To date, the Company has not received any patents or notice of
allowance of any patent application for the PharmaPrint Process or any products
it currently intends to commercialize. If the Company is not successful in
obtaining and maintaining adequate patent protection for the PharmaPrint
Process, it will not be able to protect its pharmaceutical products and its
ability to compete successfully in the dietary supplements market will be
impaired. Furthermore, AHP is not obligated to pay royalties on sales of any AHP
Products not covered by a patent containing claims comprising the PharmaPrint
Process applied generally or on a product-by-product basis.
There can be no assurance that the Company will obtain any patents covering
the Company's technology or the products the Company plans to market, or that
any patents that may be issued to the Company will provide substantial
protection or be of commercial benefit to the Company. Any patent covering the
PharmaPrint Process may be vulnerable to challenge on various grounds, including
lack of nonobviousness or novelty. A great deal of research and development work
has taken place in botanicals, including efforts focused on single-molecule
bioactivity and analysis of multiple botanical components. The Company believes
the PharmaPrint Process is unique and patentable because of its focus on
determining pharmaceutical grade botanicals by identifying bioactive components
having activity relevant to clinical indications and establishing manufacturing
standards covering the range of bioactivity of the total of said components, but
it is arguable that prior work on bioactivity relating to the development of
single molecule drugs or multi-molecule chemical composition analysis could
contradict novelty or nonobviousness of the Company's invention. The PTO's
initial response to one of the Company's patent applications covering the
PharmaPrint Process was an office action dated November 1997 in which the patent
examiner questioned the patentability of the claims set forth in the
application, asserting that they are anticipated by prior art focused on
separation of plant extracts into components and identification of biologically
active components, and also reflect the well-known process of preparation of
standardized extracts to ensure product consistency. A search by the European
Patent Office in response to a related patent application produced similar
results. Many patent applications encounter similar office actions and
ultimately result in issuance of a patent, and the Company believes that the
cited prior art can be adequately distinguished on the basis of the Company's
focus on determining pharmaceutical grade botanicals through bioactivity as
described above. The Company intends to pursue its patent claims and believes
that it will overcome the examiner's issues. However, there can be no assurance
that a patent covering the PharmaPrint Process will issue or that prior art will
not support a challenge to any patent that issues. The issuance of a patent is
not conclusive as to its validity or enforceability, and competitors may be able
to design around any patent the Company obtains, including by finding ways to
substantiate claims about the composition or bioactivity of competing products
without utilizing the process used by the Company. There can be no assurance
that any patent issued to the Company will not be invalidated, or that the
Company will not be forced to narrow, through reexamination, the scope of such a
patent claim to avoid its invalidation. In addition, there can be no assurance
that any application of the Company's technology will not infringe patents or
proprietary rights of others or that licenses that might be required as a result
of such infringement for the Company's processes or products would be available
on commercially reasonable terms, if at all.
Litigation, which could result in substantial cost to the Company and
diversion of effort by the Company's management and technical personnel, may be
necessary to enforce the Company's patent and proprietary rights and/or to
determine the scope and validity of others' proprietary rights. The Company is
currently involved in litigation with a former employee who has asserted, among
other things, ownership rights in the Company's pending patent applications. The
Company does not believe his claims have merit. See "Business--Legal
Proceedings." The Company may participate in interference proceedings that may
in the future be declared by the PTO to determine priority of invention, which
could result in substantial
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cost to the Company. There can be no assurance that the outcome of any
litigation or interference proceedings will be favorable to the Company and an
unfavorable outcome in any proceeding could have a material adverse effect on
the Company's business, financial condition and results of operations.
The patent position of biotechnology and biopharmaceutical firms generally
is highly uncertain and involves complex legal and factual questions. To date,
no consistent policy has emerged regarding the breadth of claims allowed in
biotechnology and biopharmaceutical patents. Accordingly, there can be no
assurance that any patent applications owned or licensed by the Company will
result in patents being issued or that, if issued, the patents will afford
protection against competitors with similar technology.
Many of the processes and much of the know-how of importance to the
Company's technology depend upon the non-patentable skills, knowledge, and
experience of its scientific and technical personnel and collaborators. To help
protect its rights, the Company requires employees, collaborators, and
significant consultants and advisors with access to confidential information, to
enter into confidentiality agreements with the Company. There can be no
assurance, however, that these agreements will provide adequate protection for
the Company's trade secrets, know-how or proprietary information in the event of
any unauthorized use or disclosure.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
In order to obtain marketing approval from the FDA, the Company must
demonstrate through toxicology testing and clinical trials that PPRT-321, its
only drug candidate for which the FDA has allowed clinical trials to date, is
safe and effective for use in its target indication. The results from initial
clinical trials of PPRT-321 and any other drug candidates may not be indicative
of the results that may be obtained in further clinical trials. Many companies
have suffered significant setbacks in advanced clinical trials, even after
promising results in earlier trials. The rate of completion of the Company's
clinical trials may be delayed by many factors including, but not limited to,
slower than anticipated patient enrollment, a slower than anticipated timetable
as determined by the Company or any collaborative partner, or any other adverse
event. During the course of clinical trials, patients can die or suffer other
adverse medical effects for reasons that may not be related to the drug being
tested, but which can nonetheless affect clinical trial results. There can be no
assurance that the Company will be permitted by regulatory authorities to
undertake additional clinical trials of PPRT-321 or to initiate clinical trials
of any other drug candidates, or that any clinical trials undertaken by the
Company will be completed successfully within a particular time period, if at
all. Any delays in or termination of the Company's clinical trial efforts would
have a material adverse effect on the business, financial condition and results
of operations of the Company. There can also be no assurance that PPRT-321 or
any other drug candidate will be safe or effective in clinical trials, that
PPRT-321 or any other drug candidate will receive regulatory approval for any
indication or that any clinical trials undertaken by the Company will result in
marketable products. If PPRT-321 or other drug candidates are not shown to be
safe and effective in clinical trials, the Company's business, financial
condition and results of operations would be materially adversely affected.
OUTSOURCING OF MANUFACTURING, RESEARCH AND DEVELOPMENT AND REGULATORY ACTIVITIES
The Company has no experience in the manufacturing, sale, marketing,
distribution and clinical testing of pharmaceutical products or dietary
supplements and will have to rely on collaborative arrangements or license and
distribution agreements with third parties. The Company does not have the
facilities or capability to manufacture, and has not yet manufactured on a
commercial scale, its potential products. The Company has entered into
agreements with Hauser, Inc. to, among other things, manufacture PPRT-321 for
use in clinical tests, to supply certain herbal extracts to the Company and to
provide analytical tests for each manufactured batch. To be successful, if
approved by the FDA, the Company's pharmaceutical products must be manufactured,
at an acceptable cost, in commercial quantities under the FDA's current good
manufacturing practices ("cGMP") and/or other standards prescribed by the
appropriate regulatory agency in the country of use. On an ongoing basis, the
Company will depend on its ability to
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develop such manufacturing capabilities or contract with other manufacturers. In
addition, pursuant to the Supply Agreement entered into between AHP and the
Company (the "Supply Agreement"), the Company will be the exclusive supplier to
AHP of the herbal products sold by AHP pursuant to the AHP Agreements and must
produce such products under applicable cGMP. The Company is currently in
discussions with various third parties to manufacture products for delivery to
AHP under the Supply Agreement. In the event the Company is unable to
manufacture or obtain contract manufacturing on acceptable terms, its ability to
commercialize or deliver products at acceptable cost in a timely manner may be
adversely affected. See "Business--Business Strategy."
Additionally, the Company has the exclusive right to supply AHP with 100% of
the AHP Products. If the Company fails to supply certain commercial quantities
of the AHP Products for a period of 60 consecutive days for any reason, AHP has
the right to manufacture such products itself, or retain a third party
manufacturer. There can be no assurance that the Company will be able to meet
its obligation to supply the AHP Products in sufficient commercial quantities.
The loss by the Company of manufacturing rights to AHP or a third party would
have a material adverse effect on the business, financial condition and results
of operations of the Company.
Most of the Company's research and development activities currently are
performed by various third party laboratories and manufacturing facilities.
Although the Company believes that its partners have and will continue to have
an economic motivation to perform their duties in a timely and effective manner,
the amount and timing of the resources devoted by such parties to performing
their duties may vary. Any failure to perform such duties may result in a delay
in the Company's ability to continue its product development activities and to
commercialize its products. Any such failure or delay could also result in the
Company breaching its obligations under the AHP Agreement and any other
collaborative arrangement it may enter into and could have a material adverse
effect on the business, financial condition and results of operations of the
Company.
Most of the Company's regulatory activities are currently being performed in
conjunction with Advanced Bioresearch Associates ("ABA") of San Diego,
California. In the event that ABA does not continue to provide regulatory
guidance to the Company, the Company would have to further develop its own
regulatory expertise or contract with others for regulatory guidance. There can
be no assurance that the Company, either on its own or with third parties, would
be able to further develop this regulatory expertise.
In connection with any future collaborative arrangements, the Company may be
required to transfer control of toxicology studies and clinical trials, the
preparation and submission of regulatory approvals and the manufacture of
products. In the event the Company does transfer such control, it would be
dependent upon its partners' efforts to effectively and efficiently develop such
drug candidates. Additionally, by outsourcing the manufacturing of drug
candidates, the Company may lose the opportunity to generate profits from
manufacturing.
COST AND AVAILABILITY OF BOTANICAL EXTRACTS
The Company procures the botanical extracts necessary for development of its
products from various sources in the United States, Europe and Asia. The Company
has agreed, and has the exclusive right, to supply AHP with 100% of AHP's
requirements of the products licensed to AHP by the Company. The Company will
have to purchase a significant amount of botanical extract in the near future to
meet these obligations. Many of the botanical extracts contained in the
Company's products are not commodities, so price risk cannot be hedged with
traditional futures contracts. In addition, some of these plants are picked in
the wild, rather than farm cultivated, resulting in a highly unstable supply.
This uncertain supply, in combination with the possibility of continued
increases in demand, could result in significant increases in the price of the
botanical extracts used in the Company's products. In addition, if due to supply
shortages AHP is unable to meet the demand of its customers, even if for a short
time, the result could be a long-
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term decrease in sales of the AHP Products. The Company's ability to increase
the price of its licensed products to AHP to adjust for increases in raw
material costs is limited and there can be no assurance that an adequate supply
of botanical extracts will be available to the Company and on terms commercially
viable to the Company in order for it to meet its supply obligations to AHP.
While the Company has secured sufficient quantities of botanical extracts for
its near term research and development activities and believes there are
numerous alternative suppliers throughout the world from which the Company can
obtain these botanical extracts, any curtailment in the availability of such
botanical extracts could be accompanied by delays as well as increased materials
costs that could have a material adverse effect on the business, financial
condition and results of operations of the Company. There can be no assurance
that botanical extracts will continue to be available to the Company on terms
commercially reasonable to the Company.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to
particular statutory and regulatory provisions currently in effect. Any change
in applicable laws or regulations may have a material adverse effect on the
Company's business, financial condition and results of operations. The
manufacturing, processing, formulation, packaging, labeling, advertising and
sale of dietary supplements are regulated by the Federal Food, Drug and Cosmetic
Act, as amended, inter alia, by DSHEA, and by various federal agencies,
including the FDA and the United States Federal Trade Commission (the "FTC").
The Company's activities are also regulated by various agencies of the states,
provinces, localities and countries in which the Company's products are sold.
DSHEA (i) defines dietary supplements, (ii) permits "structure/function"
statements under certain conditions and (iii) permits under certain conditions
the use of published literature in connection with the sale of herbal products.
Dietary supplements do not require approval by the FDA prior to marketing but
are nevertheless subject to various regulatory requirements concerning their
composition, permissible claims (including substantiation of any claims),
manufacturing procedures and other elements. DSHEA prohibits marketing dietary
supplements through claims for, or with intended uses in, the treatment or
prevention of diseases. There can be no assurance that the Company's dietary
supplement products can be identified and differentiated from competing products
sufficiently enough on the basis of permissible claims regarding composition to
compete successfully. The Company cannot determine what effect current or future
regulations will have on its business, financial condition or results of
operations.
The Company's development of pharmaceuticals is subject to extensive, costly
and rigorous regulation by the FDA and foreign regulatory authorities. Drugs
that have not been demonstrated to be safe and effective according to FDA
standards are typically classified as "new drugs" and require FDA approval prior
to marketing. In order to initiate a clinical trial for a new drug an
investigational new drug (an "IND") application must be submitted to the FDA.
The process of obtaining required regulatory approvals from the FDA and other
regulatory authorities often takes many years, is expensive and can vary
substantially based on the type, complexity and novelty of the pharmaceutical
product. As with any investigative new drug or device, additional governmental
regulations may be promulgated that could delay regulatory approval of the
Company's pharmaceutical products. While the Company believes, based upon
documentation in medical literature of histories of safe human use of botanical
therapeutics, that it may be able to pursue a less time-consuming development
process in the U.S. and certain foreign jurisdictions, the Company nevertheless
will be required to engage in extensive toxicology studies and clinical testing
in order to demonstrate the safety and efficacy of its pharmaceutical products
for human use and there can be no assurance of quick, or any, approval. Requests
for additional data and delays in obtaining regulatory approvals by the Company,
its collaborators or licensees would adversely affect the marketing of
pharmaceutical products developed by the Company and the Company's ability to
generate pharmaceutical product revenues or royalties.
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As mentioned above, clinical testing of a pharmaceutical product is subject
to regulation by government authorities, which includes acceptance of an IND
application by the FDA. No assurance can be given that the Company will be
permitted by regulatory authorities in the United States or elsewhere to carry
out further testing or that, if permitted, additional clinical testing will
prove that such pharmaceutical products are safe and effective to the extent
necessary to permit the Company to obtain marketing approvals for these products
from regulatory authorities. Additionally, the results of any initial toxicology
and clinical testing are not necessarily predictive of results that will be
obtained from subsequent or more extensive toxicology and clinical testing, and
there can be no assurance that further trials will be successful. Companies in
the pharmaceutical industry have suffered significant setbacks in advanced
clinical trials, even after promising results in earlier trials. The failure to
adequately demonstrate the safety and efficacy of a pharmaceutical product under
development would delay or prevent regulatory approval of the product and would
have a material adverse effect on the business, financial condition and results
of operations of the Company. Delays in obtaining U.S. or foreign approvals
could adversely affect the marketing of the Company's pharmaceutical products
and diminish any competitive advantage the Company may attain. In addition,
delays in regulatory approvals that may be encountered by corporate
collaborators or other licensees of the Company, if any, could adversely affect
the Company's ability to receive royalties. There can be no assurance that if
clinical trials are completed, they will be successful or that the Company will
be able to submit any new drug application ("NDA") on its anticipated schedule
or that any such applications will be reviewed and approved by the FDA or
foreign regulatory agencies in a timely manner, or at all. See
"Business--Business Strategy" and "Business--Government Regulation."
Although the FDA has established a "botanical" committee to provide
regulatory guidelines, including guidelines for approval of botanicals as
pharmaceuticals, the Company believes that the FDA has never approved for sale a
pharmaceutical version of a multi-molecule, botanical medicine. FDA approval of
botanicals that qualify as pharmaceuticals would presumably be evaluated under
the same statutory standards as are applied to all new drugs. However, FDA
review and approval practices adopted for botanical medicines under these
statutory standards could result in competitive natural medicines that are not
manufactured based on the Company's PharmaPrint Process technology. Adverse
governmental regulation that might arise from future legislative or
administrative action cannot be predicted.
If regulatory approval is obtained, such approval may involve limitations
and restrictions on the marketing of the Company's pharmaceutical products. In
addition, any marketed pharmaceutical product and its manufacture are subject to
continuous governmental review and post-market evaluation of approved
pharmaceutical products could result in withdrawal, suspension or limitation of
approvals. Any subsequent discovery of previously unrecognized problems could
result in restrictions on the pharmaceutical product or its manufacture,
including withdrawal of the pharmaceutical product from the market. Failure of
the Company to comply with applicable regulatory requirements can, among other
things, result in fines, suspension of regulatory approvals, pharmaceutical
product recalls, seizure of products, operating restrictions or criminal
prosecution. See "Business--Government Regulation."
The Company cannot predict whether new legislation or regulations governing
the Company's activities will be enacted by legislative bodies or promulgated by
agencies regulating the Company's products, or what the effect of any such
legislation or regulation on the Company's operations would be. There can be no
assurance that new legislation or regulation, including changes to existing laws
or regulations, will not materially adversely affect the business, financial
condition and results of operations of the Company.
NO ASSURANCE OF MARKET ACCEPTANCE
Although the Company believes there is a significant market for the
Company's proposed dietary supplement and pharmaceutical products, the Company's
success will depend significantly on acceptance by consumers and the medical
community of the efficacy of such products. In the United States, herbal dietary
supplements have been available for many years, but many physicians have shown
reluctance to
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recommend them to their patients. While the Company believes that the
PharmaPrint Process will enable it to produce products that address the concerns
that physicians, patients and other consumers traditionally have had with herbal
dietary supplements, there can be no assurance that multi-molecule,
plant-derived products in general, or the Company's products in particular, will
gain any significant degree of market acceptance. There also can be no assurance
that AHP will be able to successfully gain market acceptance of the Company's
proposed dietary supplement products.
NEED FOR ADDITIONAL FUNDING; UNCERTAIN ACCESS TO CAPITAL
The Company's current capital resources, together with the net proceeds from
this Offering, are expected to last at least 18 months, and thereafter the
Company is likely to need substantial additional funds to support its long-term
pharmaceutical product development programs. The Company has no established bank
financing arrangement. The Company's future capital requirements will depend on
many factors, including the revenues generated under the AHP Agreements,
continued scientific progress in its research and development programs, progress
with toxicology testing and clinical trials, the time and cost involved in
obtaining regulatory approvals, patent costs, competing technological and market
developments, changes in existing collaborative relationships, the Company's
ability to establish development, sales and marketing arrangements, and the cost
of establishing manufacturing capabilities. To the extent the Company's capital
resources, including the net proceeds of this Offering, are insufficient to meet
its operating requirements, the Company will seek additional funds through
equity or debt financings, collaborative or other arrangements with corporate
partners, licensees and others. Additional funds may be required sooner than
anticipated. The Company has no current arrangements with respect to, or sources
of, such additional financing. Any additional financing may have the effect of
substantially diluting the Company's book value per share and the ownership
percentage of the Company's then existing stockholders. No assurance can be
given that additional financing will be available when needed or upon terms
acceptable to the Company. The Company's ability to raise additional funds will
be adversely affected if the Company is unable to obtain patent protection for
its technologies. If adequate funds are not available, the Company may be
required to delay or terminate expenditures for certain or all of its programs
or to license to third parties the rights to commercialize products or
technologies that the Company would otherwise seek to develop and commercialize
itself, any of which could have a material adverse effect on the business,
financial condition and results of operations of the Company. See "Use of
Proceeds."
HISTORY OF OPERATING LOSSES; ANTICIPATED FUTURE LOSSES
The Company has incurred net operating losses since its inception. The
continued development of the Company's products will require the commitment of
substantial and increasing resources to conduct toxicology and clinical
development programs and to establish additional quality control, regulatory and
administrative capabilities. The Company is likely to incur substantial and
increasing operating losses as it continues its research and development efforts
and until such time, if ever, as product sales, royalties and development,
license and other fees can generate sufficient revenue to fund its continuing
operations. The Company's ability to achieve profitability depends in part on
the revenues generated from the AHP Agreements, its ability to obtain regulatory
approvals for its pharmaceutical product candidates, and, alone or with others,
successfully develop, introduce and market products. The amount of net losses
and the time required by the Company to reach profitability are highly uncertain
and there can be no assurance that the Company will ever generate revenue from
product sales or royalties or operate profitably.
COMPETITION AND TECHNOLOGICAL CHANGE
The pharmaceutical, consumer products and biotechnology industries are
subject to intense competition and rapid technological change. Competitors of
the Company in the United States and abroad are numerous, and include, among
others, pharmaceutical, consumer products, herbal products,
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biotechnology and chemical companies, as well as universities and other research
organizations. Industry-wide interest in the AHP Agreements and the use of the
Company's PharmaPrint Process technology may accelerate as the technology
becomes more widely understood and, therefore, competitors may have additional
incentive to develop technologies and products that compete with those of the
Company. There can be no assurance that these competitors will not succeed in
developing technologies and products that are more effective than any that have
been or may be developed by the Company or that would render the Company's
PharmaPrint Process and products obsolete and non-competitive. If the Company is
not successful in obtaining and maintaining adequate patent protection for the
PharmaPrint Process, competitors may be able to duplicate or exceed the
Company's efforts and capabilities.
Many of the Company's potential competitors have substantially greater
capital resources, research and development staffs and facilities than the
Company and significantly greater experience than the Company in conducting
toxicology testing and human clinical trials on new pharmaceutical products, in
obtaining FDA and other regulatory approvals of products and in manufacturing
and marketing products. Accordingly, some of the Company's competitors may
succeed in obtaining regulatory approval for products more rapidly or
effectively than the Company. Moreover, there can be no assurance that the
Company will have sufficient resources to undertake the continuing research and
development necessary to remain competitive. See "Business--Competition."
UNCERTAINTIES RELATED TO PHARMACEUTICAL PRICING AND REIMBURSEMENT
The continuing efforts of government and third-party payors to contain or
reduce the costs of health care through various means may have a material
adverse effect on the Company's business, financial condition and results of
operations. For example, in certain foreign markets, pricing and/or
profitability of pharmaceutical products are subject to government control. In
the United States, the Company expects that there will continue to be a number
of federal and state proposals to implement similar government control. In
addition, increasing emphasis on managed care in the United States will continue
to put pressure on pharmaceutical pricing. Cost control initiatives could
decrease the price the Company receives for any product it may develop and sell
in the future and have a material adverse effect on the business, financial
condition and results of operations of the Company. Additionally, to the extent
that cost control initiatives have a material adverse effect on the Company's
commercial partners, the Company's ability to commercialize any of its products
may be adversely affected.
Sales of the Company's pharmaceutical products will be dependent, in part,
on the extent to which consumers will be able to obtain reimbursement for the
cost of such products from third-party payors, such as government health
administration authorities, private health coverage insurers and other
organizations. The reimbursement status of newly approved health care products
is uncertain, and third-party payors are increasingly challenging the prices
charged for medical products. Accordingly, there can be no assurance that such
reimbursement will be available at levels that would allow the Company to
maintain profitable prices for its products, if at all. In the United States,
consumers are not typically reimbursed for the cost of non-prescription
products, including dietary supplements.
POTENTIAL PRODUCT LIABILITY; UNCERTAINTIES RELATED TO INSURANCE COVERAGE
The testing, marketing and sale of health care products entail an inherent
risk of product liability. There can be no assurance that product liability
claims, relating to either pharmaceutical or dietary supplement products, will
not be asserted against the Company, its collaborators or its licensees. The
Company has obtained limited product liability insurance coverage for its
clinical trials and intends to obtain additional product liability insurance in
connection with the AHP Agreements. There can be no assurance that the Company
will be able to maintain such product liability insurance or obtain additional
insurance, during clinical trials or upon commercialization of any product, on
acceptable terms, if at all, or that such insurance will provide adequate
coverage against any potential pharmaceutical or dietary supplement claims. A
product liability claim or product recall, relating to either pharmaceutical or
dietary
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supplement products, could have a material adverse effect on the business,
financial condition or results of operations of the Company.
DEPENDENCE ON KEY EMPLOYEES
The business of the Company is dependent upon the continuing services of
Elliot P. Friedman, its Chairman of the Board and Chief Executive Officer and
Robert Burgess, its President and Chief Operating Officer. The unavailability or
loss of the services of Mr. Friedman or Mr. Burgess could be detrimental to the
development of and would adversely affect the conduct of the Company's business.
The Company has obtained key-man life insurance in the amount of $1,000,000 on
the life of Mr. Friedman. The success of the Company is also dependent upon its
ability to attract and retain highly qualified scientific and managerial
personnel. The Company faces competition for such personnel from other
companies, research and academic institutions, government entities and other
organizations, many of which have significantly greater resources than the
Company. There can be no assurance that the Company will be able to recruit and
retain such personnel. See "Management."
VOLATILITY OF COMMON STOCK PRICE
The market prices of securities of emerging growth companies have
historically been highly volatile and the stock market from time to time has
experienced significant price and volume fluctuations that may be unrelated to
the operating performance of particular companies. Future announcements
concerning the Company or its competitors, including the results of toxicology
testing and clinical trials, termination or modification of agreements with
collaborative partners, failures or unexpected delays in manufacturing or in
obtaining regulatory approvals, technological innovations, statements or
recommendations by the FDA or FDA advisory panels, loss of key personnel,
government regulations, developments or disputes concerning proprietary rights,
litigation or public concern as to the safety or commercial value of the
Company's technologies or products could result in the Company's failure to meet
the expectations of securities analysts and investors and could cause the market
price of the Common Stock to fluctuate and decline significantly. In addition,
market conditions for emerging growth companies and pharmaceutical companies,
economic conditions and general stock market movements, even if unrelated
specifically to the Company's operations, may have a significant impact on the
price of the Common Stock. In the past, following significant drops in the price
of a company's common stock, securities class action litigation has often been
instituted against such company. Such litigation against the Company could
result in substantial costs and a diversion of management's attention and
resources, which may have a material adverse effect on the business, financial
condition and results of operations of the Company.
DILUTION
Purchasers of the Common Stock offered hereby will incur immediate and
substantial dilution in the net tangible book value per share. Based on the net
tangible book value per share of Common Stock on September 30, 1997 and an
assumed offering price of $10.75, dilution in net tangible book value for
purchasers in the Offering will be $9.35 per share. See "Dilution."
CONTROL BY EXISTING STOCKHOLDERS AND MANAGEMENT
Following completion of this Offering, the current executive officers,
directors and other significant stockholders of the Company will own
approximately 51.5% of the issued and outstanding shares of Common Stock.
Accordingly, such persons should be able to continue to control the Board of
Directors of the Company and to direct the affairs of the Company. See
"Principal Stockholders."
17
<PAGE>
POTENTIAL ADVERSE EFFECTS OF SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 12,553,684 shares of
Common Stock outstanding (12,778,684 shares if the over-allotment option is
exercised in full). Officers and directors of the Company have entered into
lock-up agreements restricting each such person from selling any shares of
Common Stock of the Company beneficially held by such person for a period of 180
days (and with respect to 200,000 shares only, 120 days) from the date of the
Underwriting Agreement. These lock-up agreements cover approximately 6,461,318
issued shares, of which 910,150 shares may be subject to sale notwithstanding
the lock-up agreements pursuant to margin agreements and lines of credit between
two officers of the Company and an investment bank, and 1,388,438 shares
issuable upon exercise of outstanding options. These lock-up agreements may be
waived at any time by CIBC Oppenheimer Corp. See "Underwriting." In addition, in
connection with the Company's August 1996 initial public offering, certain
officers, directors and stockholders of the Company entered into lock-up
arrangements with the underwriter of the Company's initial public offering,
which prohibited each of them from selling or transferring, except in certain
limited circumstances, their shares of Common Stock until August 16, 1998 and,
in certain instances, until August 16, 2001. Such lock-up agreements currently
cover approximately 693,906 shares (and any additional shares acquired by
persons bound by such agreements) and may be released at any time in the sole
discretion of the underwriter of the company's initial public offering and will
be released in certain additional circumstances.
Following this Offering, approximately 59.5% of the Company's outstanding
shares of Common Stock will be "restricted securities" and may, subject to the
provisions of the lock-up agreements described herein, in the future be sold in
compliance with Rule 144 adopted under the Act ("Rule 144"). Rule 144 generally
provides that beneficial owners of common stock who have held such common stock
for one year may sell within a three-month period a number of shares not
exceeding the greater of 1% of the total outstanding shares or the average
weekly trading volume of the shares during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain manner of sale
limitations, notice requirements and the availability of current public
information about the Company. Rule 144(k) provides that a person who is not
deemed an "affiliate" and who has beneficially owned shares for at least two
years is entitled to sell such shares at any time under Rule 144 without regard
to the limitations described above. Future sales of restricted Common Stock
under Rule 144 or otherwise could negatively impact the market price of the
Common Stock.
As of the date of this Prospectus, there are an aggregate of 2,010,378
shares of Common Stock reserved for issuance upon exercise of outstanding vested
and non-vested stock options under the Company's 1995 Stock Option Plan at
exercise prices ranging from $0.96 to $16.00 per share, options to purchase an
additional 189,622 shares of Common Stock available for issuance under the
Company's 1995 Stock Option Plan, and 300,000 shares of Common Stock reserved
for issuance upon exercise of outstanding warrants exercisable at $5.50 per
share, and 75,000 shares of Common Stock reserved for issuance upon exercise of
the Representative's Warrants. The Company has not to date provided any
registration of the employee options, which has limited the optionees' ability
to exercise and sell the underlying common stock. The Company intends to provide
such a registration soon after applicable prohibitions on Company registration
expire approximately 180 days from the date of this Prospectus (or such earlier
date as CIBC Oppenheimer Corp. may in its discretion allow). When and if such a
registration is provided, optionees should be expected to exercise and sell,
possibly resulting in reduction in the trading price of the Company's shares.
The Company expects that as of March 31, 1998 options to purchase approximately
1,450,000 shares of Common Stock will be outstanding and vested, approximately
1,264,000 shares of which will be subject to the lock-up agreements described
above.
The Company also has an aggregate of approximately 3,351,518 shares of
Common Stock subject to registration rights agreements. The Company has not to
date provided any registration to the holders of such shares, which has limited
such holders' ability to exercise and sell the underlying stock. See
"Description of Capital Stock--Warrants; Registration Rights."
18
<PAGE>
ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCES OF PREFERRED STOCK
Certain provisions of the Delaware General Corporation Law may have the
effect of deterring hostile takeovers or delaying or preventing changes in the
control or management of the Company, including transactions in which
stockholders may otherwise receive a premium for their shares over then-current
market prices. The Company may also issue shares of Preferred Stock without
stockholder approval and upon such terms as the Company's Board of Directors may
determine. The issuance of Preferred Stock could have the effect of making it
more difficult for a third party to acquire a majority of the Company's
outstanding stock and the holders of such Preferred Stock could have voting,
dividend, liquidation and other rights superior to those of holders of Common
Stock. See "Description of Capital Stock--Preferred Stock" and "Certain
Provisions of the Delaware Anti-Takeover Law."
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does
not intend to do so for the foreseeable future. The Company intends to retain
any future earnings for use in the Company's business operations. Investors who
anticipate a need for income from their investments should refrain from
purchasing the Common Stock offered hereby.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,500,000 shares of Common Stock offered hereby are estimated to be
approximately $14,521,250 ($16,770,688 if the Underwriters' over-allotment
option is exercised in full), at an assumed public offering price of $10.75 per
share and after deducting estimated underwriting discounts and commissions and
other estimated offering expenses.
The Company expects to use a majority of the net proceeds of this Offering
to fund formulation, toxicology and clinical testing of the Company's
pharmaceutical products and the remainder of the net proceeds of this Offering
to fund formulation and manufacturing of the AHP Products pursuant to the AHP
Agreements, potential acquisitions of research and manufacturing facilities and
working capital and general corporate purposes. The Company is not a party to
any agreements, understandings or commitments with respect to any such
acquisition.
The amounts and timing of expenditures for each purpose may vary
significantly depending on numerous factors, including, without limitation, the
progress of the Company's research, drug discovery and development programs, the
progress and results of toxicology studies and clinical trials, the timing and
costs involved in obtaining regulatory approvals, the costs of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments, changes in the
Company's existing research relationships, the ability of the Company to
establish collaborative arrangements, the initiation of commercialization
activities, the purchase of capital equipment and the availability of other
financing. The Company anticipates, based on currently proposed plans and
assumptions relating to its operations, that the Company's available cash and
short-term investments, the proceeds of this Offering and cash flow from
operations, if any, will be adequate to satisfy its capital needs for at least
18 months following consummation of this Offering.
Pending such uses, the net proceeds of this Offering will be invested in
short-term, investment-grade, interest-bearing securities.
PRICE RANGE OF COMMON STOCK
PharmaPrint's Common Stock has been traded on the Nasdaq National Market
under the symbol "PPRT" since the Company's initial public offering in August
1996. The following table sets forth the range of high and low sales prices for
the Common Stock as reported by Nasdaq for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 1998 HIGH LOW
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Fourth Quarter (through January 8, 1998)....................................................... $ 12.25 $ 10.50
Third Quarter.................................................................................. 18.13 8.25
Second Quarter................................................................................. 14.50 6.00
First Quarter.................................................................................. 7.62 4.00
FISCAL YEAR ENDED MARCH 31, 1997
- -----------------------------------------------------------------------------------------------
Fourth Quarter................................................................................. 5.50 3.88
Third Quarter.................................................................................. 5.50 4.50
Second Quarter (from August 16, 1996).......................................................... 6.50 4.63
</TABLE>
On January 8, 1998, the last reported sales price as reported by Nasdaq was
$10.75 per share. As of December 31, 1997, there were approximately 164 holders
of record of the Company's Common Stock. The Company believes that the actual
number of shareholders of the Common Stock substantially exceeds this number.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock
and does not intend to do so for the foreseeable future.
20
<PAGE>
DILUTION
As of September 30, 1997, the net tangible book value of the Company's
Common Stock was $2,936,045, or $0.27 per share of Common Stock, based upon
11,005,202 shares outstanding. "Net tangible book value" per share represents
the amount of total tangible assets of the Company reduced by the total
liabilities and divided by the number of shares of Common Stock outstanding.
After giving effect to the sale of 1,500,000 shares of Common Stock being
offered by the Company hereby, less underwriting discounts and commissions and
estimated offering expenses payable by the Company, the Company's pro forma net
tangible book value at September 30, 1997 would have been $17,457,295, or $1.40
per share of Common Stock, based upon 12,505,202 shares outstanding. This
represents an immediate increase in net tangible book value of $1.13 per share
to existing stockholders and an immediate dilution per share of $9.35 to new
investors purchasing shares in this Offering. "Dilution per share to new
investors" represents the difference between the price per share of Common Stock
paid for shares issued in this Offering and the pro forma net tangible book
value per share at September 30, 1997, as adjusted to give effect to this
Offering.
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed public offering price per share(1).................................. $ 10.75
Net tangible book value per share before Offering....................... 0.27
Increase per share attributable to new investors........................ 1.13
Pro forma net tangible book value per share after Offering.................. 1.40
---------
Dilution per share to new investors................................. $ 9.35
---------
---------
</TABLE>
- ------------------------
(1) Before deduction of underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The foregoing computations exclude (i) 48,482 shares of Common Stock issued
subsequent to September 30, 1997; (ii) an aggregate of 2,010,378 shares of
Common Stock reserved for issuance upon exercise of outstanding stock options
under the Company's 1995 Stock Option Plan, as amended at a weighted average
exercise price of $5.23 per share; and (iii) 375,000 shares of Common Stock
reserved for issuance upon exercise of outstanding warrants, including the
Representative's Warrants. Any exercise of such options or warrants may result
in further dilution to new investors.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997, and as adjusted for the sale of 1,500,000 shares of Common
Stock offered hereby at an assumed offering price of $10.75 per share and the
application of the estimated net proceeds therefrom. This table should be read
in conjunction with the Company's financial statements and the notes thereto
included in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------
ACTUAL AS ADJUSTED
-------------- --------------
<S> <C> <C>
Stockholders' Equity (1):
Preferred stock, par value $0.001--1,000,000 shares authorized, no shares issued
or outstanding................................................................ $ -- $ --
Common stock, without par value--19,000,000 shares authorized, 11,005,202 shares
issued and outstanding actual, 12,505,202 issued and outstanding as
adjusted(2)................................................................... 23,410,972 37,932,222
Additional paid-in capital...................................................... 1,130,370 1,130,370
Deferred compensation........................................................... (114,433) (114,433)
Deficit accumulated during the development stage................................ (21,265,699) (21,265,699)
-------------- --------------
Total stockholders' equity.................................................... $ 3,161,210 $ 17,682,460
-------------- --------------
-------------- --------------
Total capitalization.......................................................... $ 3,161,210 $ 17,682,460
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) Does not reflect changes in the number and par value of shares of authorized
Common Stock resulting from the Company's October 2, 1997 reincorporation in
Delaware. See "Description of Capital Stock."
(2) Does not include (i) 48,482 shares issued subsequent to September 30, 1997;
(ii) an aggregate of 2,010,378 shares of Common Stock reserved for issuance
upon exercise of outstanding stock options under the Company's 1995 Stock
Option Plan, as amended, at a weighted average exercise price of $5.23; and
(iii) 375,000 shares of Common Stock reserved for issuance upon exercise of
outstanding warrants, including the Representative's Warrants.
22
<PAGE>
SELECTED FINANCIAL DATA
THE FOLLOWING SELECTED HISTORICAL FINANCIAL DATA FOR THE PERIOD FROM
INCEPTION (SEPTEMBER 15, 1994) TO MARCH 31, 1995 AND FOR THE FISCAL YEARS ENDED
MARCH 31, 1996 AND 1997 HAVE BEEN DERIVED FROM THE COMPANY'S AUDITED FINANCIAL
STATEMENTS. THE FINANCIAL DATA FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND
1997 HAVE BEEN DERIVED FROM THE UNAUDITED FINANCIAL STATEMENTS OF THE COMPANY
AND, IN THE OPINION OF THE COMPANY, REFLECT ALL ADJUSTMENTS (CONSISTING ONLY OF
NORMAL RECURRING ADJUSTMENTS) NECESSARY FOR A FAIR PRESENTATION OF THE FINANCIAL
POSITION AND RESULTS OF OPERATIONS OF THE COMPANY FOR SUCH PERIODS. THE SELECTED
HISTORICAL FINANCIAL DATA SET FORTH BELOW SHOULD BE READ IN CONJUNCTION WITH THE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND THE FINANCIAL STATEMENTS AND NOTES THERETO, WHICH ARE SET FORTH
ELSEWHERE IN THIS PROSPECTUS.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION SIX MONTHS ENDED SEPTEMBER
(SEPTEMBER 15, YEAR ENDED MARCH 31, 30,
1994) TO MARCH ----------------------------- ----------------------------
31, 1995 1996 1997 1996 1997
-------------- ------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................ $ -- $ -- $ -- $ -- $ --
Expenses:
Research and development
expenses.......................... 378,456 386,878 2,980,064 786,495 2,717,402
General and administrative
expenses.......................... 105,552 653,557 2,919,351 1,640,497 1,863,712
Stock compensation expense........ -- 303,750 5,333,437 4,585,000 3,623,540
-------------- ------------- -------------- ------------- -------------
Loss from operations................ (484,008) (1,344,185) (11,232,852) (7,011,992) (8,204,654)
-------------- ------------- -------------- ------------- -------------
Net loss............................ $ (484,008) $ (1,344,185) $ (11,232,852) $ (7,011,992) $ (8,204,654)
-------------- ------------- -------------- ------------- -------------
-------------- ------------- -------------- ------------- -------------
Net loss per share.................. $ (0.06) $ (0.16) $ (1.10) $ (0.79) $ (0.73)
-------------- ------------- -------------- ------------- -------------
-------------- ------------- -------------- ------------- -------------
Weighted average common and common
share equivalents outstanding..... 7,635,474 8,297,103 10,193,131 8,893,702 11,223,072
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------- SEPTEMBER 30,
1995 1996 1997 1997
---------- ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 130,387 $ 889,740 $ 8,170,072 $ 3,281,188
Working capital........................................... 234,381 585,726 7,413,069 2,719,293
Total assets.............................................. 248,881 1,155,604 8,831,920 4,052,964
Total liabilities......................................... 14,500 515,792 1,094,596 891,754
Stockholders' equity...................................... 234,381 639,812 7,737,324 3,161,210
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, BUT NOT LIMITED
TO, STATEMENTS CONCERNING THE APPLICATION OF THE PHARMAPRINT PROCESS,
COMMENCEMENT AND COMPLETION OF TOXICOLOGY STUDIES AND CLINICAL TRIALS, THE
TIMING OF PLANNED REGULATORY FILINGS, PLANNED ACTIVITIES OF EXISTING AND
POTENTIAL COLLABORATIVE PARTNERS, THE COMPANY'S STRATEGIC PLANS, THE SCOPE OF
THE COMPANY'S PATENT COVERAGE, ANTICIPATED EXPENDITURES, THE NEED FOR ADDITIONAL
FUNDS AND OTHER EVENTS AND CIRCUMSTANCES DESCRIBED IN TERMS OF THE COMPANY'S
EXPECTATIONS OR INTENTIONS. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM
THOSE DISCUSSED IN THIS PROSPECTUS AS A RESULT OF VARIOUS FACTORS INCLUDING, BUT
NOT LIMITED TO, THE UNCERTAINTY OF PATENT ISSUANCE AND PROTECTION, MARKET AND
REGULATORY ACCEPTANCE OF THE COMPANY'S TECHNOLOGY, PRODUCT REVENUE AND THE OTHER
RISKS DISCUSSED UNDER "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS IN THE
PROSPECTUS GENERALLY.
OVERVIEW
PharmaPrint uses its PharmaPrint Process technology to develop
pharmaceutical-grade dietary supplement and pharmaceutical products from
botanical sources. The Company believes that its PharmaPrint Process technology
represents a new paradigm in the development of therapeutic products from
botanical sources. Unlike the traditional drug development process of
identifying, isolating and synthesizing single bioactive molecules from plant
and other sources, the Company's core technologies were developed based on
empirical data that suggest that the health benefits and safe usage of certain
plant-derived therapeutics might be the result of the natural combination of
multiple molecules found in the plant extract and that single molecules, in
isolation, may not replicate the natural plant's effectiveness. The PharmaPrint
Process technology enables the Company to identify and quantify the bioactives
within plant sources that are believed to provide therapeutic or other health
benefits and produce dietary supplements and pharmaceuticals having consistent
batch-to-batch quantities and ratios of these bioactives.
Since its inception in 1994, the Company has engaged only in research and
development activities and intends to continue research, development and testing
of its proprietary technologies and dietary supplement and pharmaceutical
products. The Company has not received any royalties or revenues from product
sales.
In October 1997 the Company entered into the AHP Agreements whereby the
Company will apply the PharmaPrint Process to produce a line of
pharmaceutical-grade dietary supplement products to be marketed in the U.S.,
Canada and Mexico exclusively by AHP under the Centrum brand name. In exchange
for the exclusive right to use the PharmaPrint Process in the production of
dietary supplements, AHP paid the Company $2.5 million as an up-front licensing
fee and is required to pay additional fees of $500,000 upon each of (i) the
issuance of a patent containing claims covering the PharmaPrint Process and (ii)
receipt and acceptance of the initial AHP Products in sufficient time to permit
AHP to meet its proposed product launch date. AHP has agreed, in the first two
years following shipment by AHP of commercial quantities of the first AHP
Product, to spend annually at least the lesser of $20 million or an amount equal
to 50% of net sales of the AHP Products in advertising and other marketing
expenditures. AHP has also agreed to purchase the AHP Products from the Company
under a Supply Agreement at specified prices. In addition, if the Company
succeeds in securing a patent containing a claim or claims comprising the
PharmaPrint Process applied generally or on a product-by-product basis, AHP will
pay royalties to the Company on net sales of such patented AHP products of 4% in
the first year and 6% thereafter. AHP plans to commence marketing seven of the
Company's dietary supplement products under development in 1998. AHP and the
Company will examine from time to time the opportunity to increase or modify
this product line.
24
<PAGE>
The Company is also developing pharmaceuticals from natural plant sources
for the purpose of seeking FDA approval. Products derived from the same
botanical sources as those used in the Company's product development programs
historically have been widely used as medicines and dietary supplements. Because
of the well-documented history of safe usage of dietary supplements derived from
the same plant source as the Company's drug candidates, the Company believes
that, in certain cases, the FDA may allow the Company, or its prospective
partners, to commence clinical trials at the Phase II stage, while concurrently
performing toxicology studies. The Company has received such FDA permission for
its initial pharmaceutical candidate, PPRT-321. The Company anticipates filing
investigational new drug ("IND") applications for at least two other drug
candidates within the next 12 months. As a result of these anticipated filings,
and the clinical development program for PPRT-321, the Company believes that its
research and development expenses will substantially increase over the next 12
months.
RESULTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SIX MONTHS ENDED SEPTEMBER
30, 1996
Research and development expenses for the six months ended September 30,
1997 increased $1,930,907, or 246%, to $2,717,402 from $786,495 for the six
months ended September 30, 1996. The increase was primarily attributable to
increased development efforts for both the Company's pharmaceutical and dietary
supplement products. The Company's development efforts with respect to its
pharmaceutical products included preparation and completion of regulatory
filings, preparation for and commencement of certain toxicology studies and
clinical trials and other research and development expenses. The Company's
development efforts with respect to its dietary supplement products included the
application of the Company's PharmaPrint Process to several products, including
products that are expected to be marketed by AHP. The Company's research and
development expenses are expected to increase in the next 12 months due to the
responsibilities set forth in the AHP Agreements, preparation and completion of
additional regulatory filings and overall clinical development programs for its
pharmaceutical candidates. Additionally, the Company plans to selectively add
personnel in research and development in order to accomplish its research and
development plans.
General and administrative expenses for the six months ended September 30,
1997 increased $223,215, or 13.6%, to $1,863,712 from $1,640,497 for the six
months ended September 30, 1996. The increase was primarily attributable to
additional staff, Company marketing efforts, increased professional fees and
increased office rent and general office expenses. The Company's general and
administrative expenses are expected to increase in the next 12 months in
support of its research and development activities and its product
commercialization efforts.
Stock compensation expense for the six months ended September 30, 1997 was
$3,623,540. Of this amount, $3,563,540 related to the release of an officer of
the Company from a lock-up agreement and $60,000 represented compensation
expense relating to certain options to purchase Common Stock granted to a
consultant of the Company. Stock compensation expense for the six months ended
September 30, 1996 was $4,585,000 and related to conditions that were met on
Common Stock granted to D-RAM Industries Pty. Ltd. and Dimension Memory, Inc.
As a result of the foregoing factors, the Company's net loss for the six
months ended September 30, 1997 increased $1,192,662, or 17%, to $8,204,654 from
$7,011,992 for the six months ended September 30, 1996.
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
Research and development expenses for the year ended March 31, 1997
increased $2,593,186, or 670%, to $2,980,064 from $386,878 for the year ended
March 31, 1996. The increase was primarily attributable to increased development
efforts related to the Company's pharmaceutical products. The Company's
development efforts with respect to its pharmaceutical products included
preparation and
25
<PAGE>
completion of regulatory filings, preparation for and commencement of certain
toxicology studies and clinical trials and other research and development
expenses.
General and administrative expenses for the year ended March 31, 1997
increased $2,265,794, or 347%, to $2,919,351 from $653,557 for the year ended
March 31, 1996. The increase was primarily attributable to additional staff,
Company marketing efforts, increased professional fees and increased office rent
and general office expenses.
Stock compensation expense for the year ended March 31, 1997 was $5,333,437.
Of this amount, $4,585,000 related to conditions that were met on Common Stock
granted to D-RAM Industries Pty. Ltd. and Dimension Memory, Inc., $648,437
related to the fair value of stock transferred by a major shareholder to third
parties as compensation for services and $100,000 related to stock compensation
expense for options to purchase Common Stock of the Company that were granted to
consultants. Stock compensation expense for the year ended March 31, 1996, was
$303,750. The compensation expense represented certain options to purchase
Common Stock of the Company that were granted at an exercise price below the
fair market value of the Company's Common Stock on the date of grant.
As a result of the foregoing factors, the Company's net loss for the year
ended March 31, 1997 increased $9,888,667, or 736%, to $11,232,852 from
$1,344,185 for the year ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of equity
securities. From inception (September 15, 1994) through May 1996, the Company
had raised an aggregate net amount of approximately $2,100,000 through private
sales of equity securities. In August 1996, the Company completed an initial
public offering of 3,000,000 shares of its Common Stock at $5.00 per share,
raising net proceeds of approximately $12,705,000.
During the six months ended September 30, 1997 the Company increased its
staff of full-time employees and consultants from 12 to 18. During fiscal 1998,
the Company expects to continue to significantly increase its staffing levels.
In November 1997, the Company entered into a commitment with Hauser, Inc. to
purchase $20,000,000 of raw materials over the next three years in order to
supply certain dietary supplements under the AHP Supply Agreement. The Company
does not presently have any material commitments for capital expenditures.
The Company has incurred net operating losses since its inception and
expects substantial net operating losses in the near term as it continues its
research and development efforts. The Company will incur additional net
operating losses until such time as the Company can generate sufficient revenue
from product sales, royalties, development, license and other fees to fund
continuing operations. The Company's ability to generate revenues are dependent
upon many factors, including, but not limited to its ability to develop,
introduce and market products, enter into collaborative arrangements and obtain
regulatory approvals.
While the Company has not had any operating profits, the Company believes
that its current capital resources and the proceeds of this Offering will enable
it to maintain its current and planned operations for at least 18 months.
However, no assurance can be given that there will be no change in the Company's
operations that would consume available resources more rapidly than anticipated.
The Company will need substantial funds to support its long term pharmaceutical
product development programs. The Company has no established bank financing
arrangement and it is unlikely that the Company will establish a bank financing
arrangement in the foreseeable future. The Company's future capital requirements
will depend on many factors, including, without limitation, the progress of the
Company's research, drug discovery and development programs, the progress and
results of toxicology studies and clinical trials, the timing and costs involved
in obtaining regulatory approvals, the costs of filing, prosecuting, defending
and enforcing
26
<PAGE>
any patent claims and other intellectual property rights, competing
technological and market developments, changes in the Company's existing
research relationships, the ability of the Company to establish collaborative
arrangements, the initiation of commercialization activities, the purchase of
capital equipment and the availability of other financing. To the extent that
the Company's capital resources, including the net proceeds from this Offering,
are insufficient to meet its operating requirements, the Company will seek
additional funds through equity or debt financings, collaborative or other
arrangements with corporate partners, licensees and others. The Company has no
current arrangements with respect to, or sources of, such additional financing,
and the Company does not anticipate that existing stockholders will provide any
portion of the Company's future financing requirements. Any additional financing
may have the effect of substantially diluting the Company's book value per share
and the ownership percentage of the Company's then existing stockholders.
Additionally, no assurance can be given that additional financing will be
available when needed or upon terms acceptable to the Company. If adequate funds
are not available, the Company may be required to delay or terminate
expenditures for certain or all of its programs or to license to third parties
the rights to commercialize products or technologies that the Company would
otherwise seek to develop and commercialize itself, any of which could have a
materially adverse effect on the business, financial condition or results of
operations of the Company. See "Use of Proceeds."
At March 31, 1997, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $5,100,000 and
$2,550,000, respectively; such carryforwards expire in various years through
2012.
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BUSINESS
OVERVIEW
PharmaPrint uses its PharmaPrint Process technology to develop
pharmaceutical-grade dietary supplements and pharmaceuticals from botanical
sources. The Company believes that its PharmaPrint Process technology represents
a new paradigm in the development of therapeutic products from botanical
sources. Unlike the traditional drug development process of identifying,
isolating and synthesizing single bioactive molecules from plant and other
sources, the Company's core technologies were developed based on empirical data
that suggests that the health benefits and safe usage of certain plant-derived
therapeutics might be the result of the natural combination of multiple
molecules found in the plant extract and that single molecules, in isolation,
may not replicate the natural plant's effectiveness. The PharmaPrint Process
technology enables the Company to identify and quantify the bioactives within
plant sources that are believed to provide therapeutic benefits and produce
products having consistent batch-to-batch quantities and ratios of these
bioactives.
The Company is applying a dual commercialization strategy with its
PharmaPrint Process technology. The first application of the PharmaPrint Process
is for the development of high quality, herbal dietary supplements. In October
1997, the Company entered into several agreements with AHP whereby the Company
will apply the PharmaPrint Process to produce pharmaceutical-grade dietary
supplement products to be marketed in the U.S., Canada and Mexico exclusively by
AHP under its Centrum brand name. Pursuant to the terms of the agreement, AHP
paid to the Company $2.5 million in an up-front licensing fee and is required to
pay an additional fee of $500,000 upon each of (i) the issuance of a patent
containing claims covering the PharmaPrint Process and (ii) receipt and
acceptance by AHP of the initial AHP Products in sufficient time to permit AHP
to meet its proposed product launch date. Additionally, AHP has agreed to spend
annually at least the lesser of $20 million or an amount equal to 50% of net
sales of the AHP Products in advertising and other marketing expenditures during
the two years following shipment by AHP of commercial quantities of the first
AHP Product. AHP has also agreed to purchase the AHP Products under a Supply
Agreement at specified prices. In addition, if the Company succeeds in securing
a patent containing a claim or claims comprising the PharmaPrint Process applied
generally or on a product-by-product basis, AHP will pay royalties to the
Company on net sales of such patented AHP products of 4% in the first year and
6% thereafter.
The second application of the PharmaPrint process is the development of
FDA-approvable pharmaceuticals from natural plant sources. The Company's initial
pharmaceutical product candidate, PPRT-321, a saw palmetto-derived drug that is
being developed for the treatment of symptoms associated with BPH, is currently
in Phase II clinical trials. In addition, the Company has begun development of
additional plant-derived medicines that are documented in medical literature as
having long histories of safe use and indications of efficacy.
HERBAL MEDICINES
Herbal medicines are multi-molecule compositions extracted or otherwise
derived from plants. Herbal products have been used for centuries throughout the
world to treat a variety of diseases and physical conditions. In recent years,
health consciousness and the increasing popularity of "all natural" products
have contributed to a growth in public interest in herbal therapies.
In many European countries, such as Germany, France and Italy, treatment
with multi-molecule, plant-derived medicines is well established, regulated by
governmental authorities and is often reimbursed by health insurance plans.
According to THE WALL STREET JOURNAL EUROPE, in 1996 approximately $6 billion
was spent in Europe for multi-molecule, plant-derived prescription and OTC
products. The leading herbal medicines in Europe include ginkgo biloba, which,
according to an independent consultant, accounted for approximately $200 million
in sales (manufacturer's wholesale price) in 1996, and St. John's wort, which
according to THE NEW YORK TIMES, has generated approximately $70 million,
(manufacturers' wholesale price) in sales this year and outsells Prozac in
Germany four to one.
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Dietary supplements are categorized as food products under DSHEA, and as
such, are not approved by the FDA prior to marketing. According to NUTRITION
BUSINESS JOURNAL, in 1996 approximately $3 billion was spent in the United
States for non-prescription, herbal products, with sales, according to the
BOSTON GLOBE, having increased over 20% a year in the last few years. These
products are now commonly sold in drugstores, supermarkets, convenience stores
and discount department stores. A nationwide survey conducted by PREVENTION
magazine found that one-third of American adults surveyed use herbs to treat
various conditions such as insomnia, premenstrual syndrome, depression,
menopause, allergies and colds. The same survey found that two-thirds of adults
thought herbal remedies are just as safe or safer than traditional drugs and 53%
said herbal remedies are at least as effective as traditional drugs.
PHARMAPRINT PROCESS
The PharmaPrint Process technology is a multi-faceted proprietary process
that combines drug screening capabilities with biologically-driven
fractionation. The PharmaPrint Process enables the Company to identify and
quantify the bioactive molecules within plant sources that are believed to
provide therapeutic or other health benefits. This allows the Company to produce
dietary supplements and pharmaceuticals with consistent batch-to-batch
quantities and ratios of these bioactives.
The PharmaPrint Process begins by developing a detailed profile of the
active components of a potential product based upon an extensive review of
available bioassays and clinical data from previous studies. The Company also
analyzes, on the basis of current medical knowledge, the relationship between
the active components and the targeted disease. The potential product is
screened in a series of relevant bioassays to analyze the relationship between
its aggregate bioactivity and clinically relevant endpoints.
A sample of the botanical is then separated using conventional chemical
separation techniques into groups of fractions selected for their potential
biological activity or contribution to biological activity. The bioactivity of
each fraction is determined through an iterative application of a series of
selected bioassays. This process of biologically-driven fractionation enables
the Company to identify the components having the desired bioactivity as well as
the components that are less active or essentially inactive. The bioactivity of
individual components is compared to the bioactivity of the aggregate compound
and correlated with clinically relevant endpoints.
The botanical is also analyzed using conventional chemistry to determine the
quantity of each component present and the results of this quantitative analysis
are combined with the bioactivity profiles of the various components to develop
chemical and bioactivity specifications. This results in a composition that has
a precise chemical and bioactivity profile that is the compound's "pharmaprint."
The PharmaPrint Process itself does not assure efficacy of the Company's
products and claims of efficacy may be made only after successful clinical
trials, which will not be conducted with respect to the Company's dietary
supplement products.
Once a compound's pharmaprint has been established, the Company tests
successive batches for conformity to that pharmaprint. Various batches of raw
plant material for the same compound can vary significantly in composition and
bioactivity so, if necessary, the Company may conform the raw plant material to
the pharmaprint through the addition of various fractions or selective batch
mixing. However, raw plant material that is significantly outside the
pharmaprint's quantitative and bioactivity ranges is rejected. Product batches
manufactured to the specifications for that compound should have consistent
bioactive compositions and potencies. Accordingly, the Company believes that
compounds produced through the PharmaPrint Process, unlike previously available
versions of botanicals, can be expected to deliver consistent pharmacological
results and, in the case of pharmaceuticals, to qualify for potential FDA
approval.
The Company has filed with the United States Patent and Trademark Office
(the "PTO") applications for a broad process patent covering a method for making
pharmaceutical-grade botanicals that incorporates the steps that make up the
PharmaPrint Process, as well as additional patent applications covering the
application of this method to the manufacture of 11 specific botanical
compositions. However, there
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can be no assurance that the Company will receive any patents comprising the
PharmaPrint Process or any products it intends to commercialize. See
"Intellectual Property."
BUSINESS STRATEGY
The Company intends to use the PharmaPrint Process as a platform technology
to develop and produce multi-molecule, botanical-derived products for sale in
both the dietary supplement and pharmaceutical markets. The Company believes
that its PharmaPrint Process will enable it to make claims of bioactivity and
potency that cannot be made about existing botanical products.
The Company is applying its PharmaPrint Process to the development of
pharmaceutical-grade dietary supplements. The Company believes that the
PharmaPrint Process will enable it to manufacture dietary supplement products
with standardized compositions and amounts of bioactives that will have a
competitive advantage over currently available products, which vary widely in
terms of composition. Additionally, because dietary supplements are regulated
under DSHEA and do not require FDA approval prior to commercialization, the
Company expects to receive revenue from these product sales sooner than from
pharmaceutical products.
The Company is also applying its PharmaPrint Process to the development of
pharmaceuticals derived from botanical products that are documented in medical
literature as having long histories of safe use and have demonstrated
indications of efficacy. The Company believes that the PharmaPrint Process will
enable it to produce multi-molecule, plant-derived compounds that, for the first
time, will have sufficient consistency of composition and potency to qualify for
clinical testing and potential FDA approval as a pharmaceutical. The Company
intends to pursue a regulatory strategy whereby it will seek to begin its
clinical trials at the Phase II stage, while concurrently performing toxicology
studies.
The Company expects to commercialize its products through collaborative
arrangements in the United States and Europe. In the United States, the
Company's dietary supplement products will be distributed through AHP. The
Company intends to use the data from its United States clinical trials to seek
approval to market its products in Europe, particularly in Germany, France and
Italy, where both prescription and OTC botanical therapeutics are widely used.
While the Company is developing dietary supplements and pharmaceutical
products from the same plant sources, the products will differ in several
important respects. Because of differing regulatory requirements, the Company
expects that the products will have different formulations and that the
advertising and labeling of its pharmaceuticals will include approved claims to
treat or prevent a disease while its dietary supplements must be marketed
without such claims. Additionally, consumers should typically be entitled to
insurance reimbursement for the cost of the Company's pharmaceutical products
while such reimbursement will not likely be available for its dietary supplement
products.
DIETARY SUPPLEMENTS BUSINESS
The Company is applying its PharmaPrint Process technology to the
development of high quality herbal dietary supplements. The Company has
commenced development of 12 of the most commonly used dietary supplements
(derived from agnus castus, bilberry, black cohosh, echinacea, garlic, ginger,
ginkgo biloba, ginseng, milk thistle, saw palmetto, St. John's wort and
valerian).
PharmaPrint's testing has indicated that different manufacturers' versions
of currently marketed dietary supplements vary widely in terms of product
composition and bioactive molecules and some contain no bioactives. The variance
in bioactive molecules creates differing levels of benefit to the consumer. The
Company believes that because the PharmaPrint Process provides for a
standardization of the bioactive composition of the dietary supplement,
consumers should have greater confidence in its products. The Company intends to
include on each product a label containing the amount of the significant
bioactive molecules present in the supplement.
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In October 1997, the Company entered into several agreements with AHP
whereby the Company will apply its PharmaPrint Process to produce pharmaceutical
grade dietary supplement products to be marketed in the U.S., Canada and Mexico
exclusively by AHP under its Centrum brand name. AHP has the right to expand its
territory to any other countries at any time within three years of the launch of
the AHP Products. Pursuant to the terms of the agreements, in 1998 AHP will
commence marketing seven of the Company's products under development, and will
examine additional product candidates from time to time in order to increase or
modify its product line. In exchange for rights to market the Company's products
under the Centrum brand name, AHP paid to the Company $2.5 million in licensing
fees and is required to pay additional fees of $500,000 upon each of (i) the
issuance of a patent containing claims covering the PharmaPrint Process and (ii)
receipt and acceptance by AHP of the initial AHP Products in sufficient time to
permit AHP to meet its proposed product launch date. Additionally, AHP has
agreed, during the two years following shipment by AHP of commercial quantities
of the first AHP Product, to spend annualy at least the lesser of $20 million or
an amount equal to 50% of net sales of the AHP Products in advertising and other
marketing expenditures and AHP is obligated to devote to the AHP Products the
efforts and resources it normally uses to market non-prescription products of
its own discovery and of similar market potential at a similar stage of product
life. If AHP fails to meet this monetary commitment (and does not otherwise
breach its obligations under the AHP Agreement), the Company's sole remedy is to
sell dietary supplements under a national and regional brand through one third
party. PharmaPrint will manufacture all of the AHP Products and sell such
products to AHP under a Supply Agreement at specified prices. In addition, if
the Company succeeds in securing a patent containing a claim or claims
comprising the PharmaPrint Process applied generally or on a product-by-product
basis, AHP will pay royalties to the Company on net sales of such patented AHP
products of 4% in the first year and 6% thereafter. The prices at which the AHP
Products will be offered to consumers will be determined by AHP, although the
Company expects that such prices will be competitive with the prices of other
dietary supplement products derived from the same botanical sources.
AHP is a publicly traded pharmaceutical and consumer products company. For
the fiscal year ended December 31, 1996 AHP had sales of $14.1 billion, of which
the Centrum product line contributed approximately $300 million. The Company
considers AHP an ideal marketing partner due to their recognized leadership
position in the consumer products/dietary supplements area. Additionally, the
Company believes that its dietary supplement products will achieve accelerated
market penetration due to the recognition of the Centrum brand name.
PHARMACEUTICAL BUSINESS
Although botanicals are source material for many single chemical entity
pharmaceuticals available in the U.S. market, the Company does not believe that
any multi-molecule, plant extract has ever received approval by the FDA to be
marketed as a pharmaceutical. While formal FDA guidelines for these plant
extracts have not yet been issued, the FDA has allowed clinical trials to be
commenced for certain botanical compounds, including the Company's Phase II
study on PPRT-321 (its saw palmetto-derived drug candidate). At recent Drug
Information Association meetings, FDA officials provided participants informal
guidance as to certain requirements for the testing of botanical
pharmaceuticals, particularly those with well-documented histories of safe use.
The Company has and will continue to incorporate this informal guidance, as
well as its experience with the FDA in the development of PPRT-321, into its
regulatory strategy to begin clinical trials at the Phase II stage, while
performing concurrent toxicology studies. While the historical human safety data
for each drug candidate will be evaluated by the FDA on an individual basis,
drug candidates for which the FDA permits the sponsor to proceed directly to
Phase II clinical trials will have the potential for more rapid approval with
accompanying cost savings as compared to traditional drugs for which historical
safety data is not as extensive. Based upon an investigational new drug (an
"IND") application that documented the extensive historical safety of saw
palmetto, the FDA permitted the Company to proceed directly to Phase II clinical
studies for PPRT-321, while concurrently conducting toxicology studies.
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The Company selects its drug candidates based on an extensive review of
available scientific and clinical literature to determine whether a particular
candidate has a history of safety and demonstrated indications of efficacy.
While the clinical trials described in such literature, including the clinical
trials described below, have not been conducted to FDA parameters and may not
have used standardized products, or had the well defined end points or
protocols, controls and procedures typical of FDA reviewed clinical trials, the
Company believes that these trials, and, in particular the safety data from such
studies, provide a useful starting point for examining potential drug
candidates. The Company also analyzes the targeted indication to evaluate
whether recognizable end points to study are available and whether the
indication is appropriate for treatment with a prescription or OTC product. In
addition, the Company assesses the potential market for such product by
evaluating the number of individuals afflicted with the specific disease or
physical condition and the potential for product sales.
The Company intends to develop its drug candidates in collaboration with
other companies. The Company is currently in discussions with several
pharmaceutical companies regarding the joint development of its botanical
pharmaceuticals. The application of the PharmaPrint Process to a potential drug
candidate and the preparation of an IND for such drug should typically take six
to 12 months. The particular drug candidates that the Company will focus its
attention on at any given time are dependent upon many factors, including the
interest of the Company's partners or potential partners and the Company's
available resources. The price at which any of the Company's pharmaceutical
products which are approved by the FDA for sale will be sold will be determined
by the Company and any of its partners at such time based upon, among other
things, market factors and the costs incurred to develop and manufacture such
products.
CURRENT PHARMACEUTICAL PRODUCT CANDIDATES
The following table sets forth the Company's pharmaceutical product
candidates, the plant source of each, the indication each is currently
anticipated to address and the status of the development process:
<TABLE>
<CAPTION>
PRODUCT PLANT SOURCE ANTICIPATED INDICATION STATUS
- ----------- ----------------- ------------------------------ ----------------------------------
<S> <C> <C> <C>
PPRT-321 Saw palmetto BPH symptoms Phase II
PPRT-152 St. John's wort Antidepressant IND expected in early 1998
PPRT-424 Ginkgo biloba Cognitive disorders PharmaPrint Process Complete
PPRT-211 Valerian Insomnia PharmaPrint Process Complete
PPRT-195 Black cohosh Post-menopausal symptoms Applying PharmaPrint Process
PPRT-550 Agnus castus Pre-menstrual symptoms Applying PharmaPrint Process
</TABLE>
PPRT-321 (SAW PALMETTO)
The Company is currently developing a pharmaceutical product derived from
the SERENOA REPENS plant, more commonly known as saw palmetto. Saw palmetto has
been used to treat the symptoms associated with BPH, a non-cancerous enlargement
of the innermost part of the prostate. BPH frequently results in a gradual
squeezing of the part of the urethra that runs through the prostate and an
inability to completely empty the bladder. This causes patients to experience a
frequent urge to urinate and a burning sensation or similar discomfort during
urination.
Most males will eventually suffer from BPH. The incidence of BPH for men in
their fifties is 50% and rises to 80% by the age of 80. Worldwide there are
approximately 118 million men over the age of 50. In the United States, an
estimated 30 million men aged 50 and over have enlarged prostates, and about
one-half of this population will visit a urologist for the relief of their
symptoms. The general aging of the population and increasing life expectancies
are anticipated to contribute to the continued growth in the number of BPH
sufferers.
Currently, three drugs are approved by the FDA to treat the symptoms of BPH:
Proscar (sold by Merck & Co.), Hytrin (sold by Abbott Laboratories) and Cardura
(sold by Pfizer), with estimated
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combined sales of $1.5 billion in 1996. Proscar is designed to treat BPH by
shrinking the prostate, while Hytrin and Cardura are alpha blockers, which treat
BPH by relaxing the muscles in the prostate and bladder neck to relieve urethral
obstruction.
Numerous clinical studies have been performed using saw palmetto. An example
of one such study, performed between October 1990 and May 1991, included 1,334
males from 323 urology practices and outpatient clinics in Germany. Four outcome
parameters were measured and included residual urine volume, urine frequency,
night time urine frequency and difficulty or pain in urination ("dysuria"). The
results of this trial showed statistically significant improvements in all of
the aforementioned outcome parameters. Residual urine volume, on average,
dropped 30% after four weeks of treatment and 50% after twelve weeks. Forty-six
percent of the patients who had pathologically elevated residual volumes at the
start of the treatment normalized over the observation period. Average urine
frequency was reduced by 30% in comparison with the starting level after four
weeks and 37% after 12 weeks. At the start of the treatment, only 12.2% of the
patients reported no night time urine frequency, or only once per night,
compared with 61.0% at the end of the treatment. Finally, dysuria symptoms
decreased from 22.2% of the patients at the beginning of treatment to 1.0% of
patients at the end of the treatment. Less than 1% of the subjects reported any
side effects.
Another study, conducted in 87 urology centers in nine European countries
from April 1993 through June 1994, compared the efficacy of a saw palmetto based
extract (Permixon) with finasteride (Proscar) in 1,098 men. Six outcome
parameters were measured and included the International Prostate Symptom Score
("IPSS"), quality of life, peak urinary flow rate, residual urine volume,
prostate size and Prostate Specific Antigen ("PSA"). Both Permixon and
finasteride decreased the IPSS (-37% and -39%, respectively), improved quality
of life (by 38% and 41%) and increased peak urinary flow rate (+25% and +30%).
Finasteride markedly decreased prostate volume (-18%) and serum PSA levels
(-41%), while Permixon improved symptoms with little effect on volume (-6%) and
no change in serum PSA levels. Finally, patients that received finasteride
experienced a statistically significant deterioration in a sexual function score
compared to those that received Permixon.
The Company has applied its PharmaPrint Process to develop a standardized
version of PPRT-321 and in July 1997 filed an IND application with the FDA to
begin clinical trials. Based upon an IND application that documented the
extensive historical safety of saw palmetto, the FDA permitted the Company to
proceed directly to Phase II clinical studies for PPRT-321, while concurrently
conducting toxicology studies. The objective of the trial is to identify the
most efficacious of three doses of PPRT-321. The clinical trial, which is
double-blinded, randomized and placebo controlled, involves 56 patients and is
being conducted in four medical centers in the United States. The primary
efficacy variables for the trial are peak urinary flow rate and the American
Urological Association Sympton Index score. The Company is currently in the
process of recruiting patients for this trial and expects results to be
available in mid-1998. Additionally, concurrent with its Phase II studies, the
Company has commenced toxicology testing.
PPRT-152 (ST. JOHN'S WORT)
The Company is developing a pharmaceutical candidate derived from HYPERICUM
PERFORATUM, more commonly known as St. John's wort. St. John's wort has been
used to treat mild to moderate depression, which is estimated to affect
approximately 18 million people in the United States.
Among the most widely prescribed antidepressants in the United States are
Prozac (Eli Lilly), Zoloft (Pfizer) and Paxil (SmithKline Beecham). The total
worldwide sales for the top selling antidepressants are approximately $4.8
billion.
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The Company has reviewed many clinical studies of St. John's wort and found
that almost all reports concluded that St. John's wort helped to improve
patients with mild to moderate depression. A 1994 German study of 3,250 patients
with primarily mild to moderate depression was conducted with patients receiving
4 weeks of treatment with 900 mg of HYPERICUM extract. Outcome measures included
the Depression Scale of von Zerssen ("D-S") and medical and patient assessment
of treatment success. The mean D-S score was reduced from 23.2 to 11.8 following
treatment. At the end of treatment, 79% of patients were either improved or
symptom-free by self-assessment, and 82% were either improved or symptom-free as
assessed by a physician. Furthermore, as evidence of HYPERICUM'S excellent
tolerability, only 79, or 2.4%, of patients reported adverse effects, which
included gastrointestinal irritation, allergic reaction, fatigue and
restlessness.
In a comparative study between a St. John's wort extract (Jarsin 300) and
imipramine, conducted from October 1992 to May 1993 as a randomized,
double-blind study in 20 centers, 135 patients with varying degrees of
depression were evaluated. The main assessment criteria for this trial were the
Hamilton Depression Scale ("HAMD"), the D-S and the Clinical Global Impressions
("CGI"). In both treatment groups, a parallel reduction of the HAMD was observed
(56.4% for Jarsin 300 and 44.8% for imipramine) and a reduction in the
transformed D-S point values (31.3% for Jarsin 300 and 25.1% for imipramine) was
also observed. Patients using Jarsin 300 appeared to benefit from greater
changes in severity of illness, a measurement criterion of CGI, than did
patients using imipramine: 81.8% of patients were classified as having improved
on Jarsin 300 against 62.5% of patients on imipramine. Undesired side effects
were reported in 11.9% of patients on Jarsin 300 versus 16.2% of patients using
imipramine.
The Company has applied its PharmaPrint Process to develop a standardized
version of PPRT-152 and intends to file an IND application in early 1998. If the
planned application is allowed, the Company expects to proceed directly into
Phase II clinical trials and perform toxicology studies shortly thereafter.
PPRT-424 (GINKGO BILOBA)
PPRT-424, the Company's GINKGO BILOBA derived pharmaceutical candidate, is
under development for the treatment of a range of cognitive disorders. The
Company believes there are very few products currently available to treat this
indication.
Several clinical studies have been performed to evaluate the effect of
GINKGO BILOBA extract on cognitive performance. In one such study performed in
the United States, as reported in October 1997 in the JOURNAL OF THE AMERICAN
MEDICAL ASSOCIATION, EGB 761, A GINKGO BILOBA extract, was evaluated in a
52-week, randomized, double-blind, placebo-controlled multicenter clinical study
of 202 mildly to severely demented patients age 45 years or older with Alzheimer
disease or multi-infarct dementia, without other significant medical conditions.
Patients were randomly assigned to receive EGb (120mg/day) or placebo. Primary
outcome measures were: Alzheimer's Disease Assessment Scale--Cognitive subscale
("ADAS-- Cog"), Geriatric Global Impression of Change ("GERRI") and Clinical
Global Impression of Change ("CGIC"). At 52 weeks, statistically significant
improvements were observed in the ADAS--Cog and GERRI for the patients treated
with EGb: 27% achieved at least a 4-point improvement on the ADAS-- Cog,
compared with 14% of patients taking placebo. Thirty-seven percent of patients
treated with EGb improved on the GERRI, as opposed to 23% taking placebo. No
significant difference was observed between treatment groups in the CGIC. No
significant difference was observed between groups in the number of patients
reporting adverse events or in the severity of events.
The Company has applied its PharmaPrint Process to develop a standardized
version of PPRT-424.
PPRT-211 (VALERIAN)
PPRT-211, the Company's VALERIAN derived pharmaceutical candidate, is under
development for the treatment of insomnia. Approximately 50 million Americans
experience a significant sleep problem each year and approximately 60% of such
people have a chronic sleep disorder. The top selling sleep aid
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products accounted for approximately $700 million of sales in 1996 and include
Ambien (G.D. Searle), Stilnox (Synthelabo) and Imovane (Rhone Poulenc Rhorer).
Several clinical studies have been performed in Europe to evaluate the
effect of valerian on sleep disorders, specifically sleep latency and sleep
quality. In one such study, reported in 1982, the effect of a valerian extract
on subjective sleep measures was studied in 128 healthy volunteers. Each subject
received both valerian and placebo. The samples were taken by the volunteers in
random order on non-consecutive nights. A statistically significant reduction in
sleep latency (time taken to fall asleep), as well as improvement in sleep
quality was reported with valerian compared with placebo. Marked effects of
valerian were observed among older people and those who considered themselves to
be habitually poor or irregular sleepers, in whom 49% and 43%, respectively,
reported reduced sleep latency with valerian. No adverse effects were reported.
The Company has applied its PharmaPrint Process to develop a standardized
version of PPRT-211.
PPRT-195 (BLACK COHOSH)
PPRT-195, the Company's BLACK COHOSH derived pharmaceutical candidate, is
under development to reduce post menopausal symptoms. In woman, cessation of
ovarian function is associated with various somatic and emotional disorders that
are summarized as "menopausal symptoms." The most characteristic and frequent
symptom is "hot flashes," which are experienced by 78% of menopausal women.
About 50% of the women suffer from emotional disorders such as depression,
nervousness, irritability and insomnia. Approximately 40 million women in the
United States are currently in menopause. Of this population, approximately
15%-25% will seek out hormone replacement therapy ("HRT"). The top-selling HRT
products accounted for approximately $1.4 billion in worldwide sales in 1996 and
include Premarin (American Home Products) and Estraderm (Novartis). The Company
is currently applying the PharmaPrint Process to develop a standardized version
of PPRT-195.
PPRT-550 (AGNUS CASTUS)
PPRT-550, the Company's AGNUS CASTUS derived pharmaceutical candidate, is
under development to treat symptoms of premenstrual syndrome ("PMS").
Approximately 85% of menstruating women in the United States experience symptoms
of PMS on a consistent basis, including cramps, irritability, depression, water
retention and fatigue. While there are no current prescription products
available in the United States to treat symptoms of PMS, ibuprofen-based OTC
products such as Advil, Motrin and Excedrin are typically used to address such
symptoms. The Company is currently applying the PharmaPrint Process to develop a
standardized version of PPRT-550.
ADDITIONAL PHARMACEUTICAL CANDIDATES
From time to time, the Company expects to evaluate additional botanical
products for development as pharmaceutical products. In June 1997, the Company
completed Phase I clinical trials for its test-case, mistletoe-derived
pharmaceutical product intended to treat immunosuppression related to HIV and
cancer. Because this product is administered by injection and because the
Company believes that the FDA is more likely to approve in a shorter time frame
herbal products intended to treat non-life threatening diseases, the Company is
focusing its near-term drug development efforts on PPRT-321, PPRT-152 and the
other candidates described above.
OUTSOURCING RELATIONSHIPS
Most of the Company's current research and development activities and a
significant amount of its regulatory activities are performed in conjunction
with the following third party laboratories, manufacturing facilities and
service providers.
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ADVANCED BIORESEARCH ASSOCIATES
Advanced Bioresearch Associates ("ABA") provides the Company with guidance
in various clinical, scientific and regulatory matters. ABA assists the Company
in developing clinical and regulatory strategies and submitting IND
applications, including clinical trial protocols, overseeing and monitoring
toxicology studies and clinical trials, gathering and reviewing existing
literature regarding drug candidates, and monitoring certain research and
development activities performed by third party laboratories. ABA is a contract
research organization that provides FDA strategic consulting and professional
services.
HAUSER, INC.
Hauser, Inc. ("Hauser") provides analytical development guidance to the
Company with a focus on biologically driven fractionation as part of the
PharmaPrint Process. Hauser also provides validated analytical support in
accordance with cGMP in connection with the Company's saw palmetto based dietary
supplement and pharmaceutical products and is a major supplier of herbal extract
to the Company. The Company has also engaged Hauser to prepare the initial
batches of PPRT-321 for use in clinical tests. Hauser is a nationally recognized
laboratory research organization with approximately 300 employees.
NOVASCREEN
NOVASCREEN ("NOVASCREEN") provides biological screening services to test the
activity of individual components, fractions and extracts as part of the
PharmaPrint Process. NOVASCREEN is a research organization that provides
research and development services to the pharmaceutical and biotechnology
industries. NOVASCREEN pioneered the concept of PROFILE, which entails testing
potential new drug candidates through a broad panel of receptor binding assays
as a tool to determine secondary therapeutic activities and/or potential side
effects of candidate compounds.
COMPETITION
The pharmaceutical and biotechnology industries are subject to intense
competition and rapid technological change. The Company believes that
industry-wide interest in the PharmaPrint Process and resulting products will
accelerate as the technology becomes more widely recognized and that competitors
may commit additional resources to develop technologies and products that
compete with those of the Company. Competitors of the Company in the United
States and abroad are numerous, and include, among others, pharmaceutical,
consumer products, herbal products, biotechnology and chemical companies as well
as universities and other research organizations. There can be no assurance that
these competitors will not succeed in developing technologies and products that
are more effective than any that have been or may be developed by the Company or
that would render the Company's technology and products obsolete and
noncompetitive. In addition, if the Company is not successful in obtaining
patent protection for its technology and products, competitors may be able to
replicate its products.
Many of the Company's potential competitors have substantially greater
capital resources, research and development staffs and facilities than the
Company and significantly greater experience than the Company in conducting
toxicology testing and human clinical trials on new pharmaceutical products, in
obtaining FDA and other regulatory approvals of products and in manufacturing
and marketing pharmaceutical products. Accordingly, a certain number of the
Company's competitors may succeed in obtaining regulatory approval for products
more rapidly or effectively than the Company. Moreover, there can be no
assurance that the Company will have sufficient resources to undertake the
continuing research and development necessary to remain competitive.
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GOVERNMENT REGULATION
To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to
particular statutory and regulatory provisions currently in effect. Any change
in applicable laws or regulations may have a material adverse effect on the
business, financial condition and results of operations of the Company. Dietary
supplements are categorized as food and are regulated by the FDA pursuant to the
Federal Food, Drug and Cosmetics Act, as amended by, inter alia, the Dietary
Supplement Health Education Act of 1994 ("DSHEA"). DSHEA (i) defines dietary
supplements, (ii) permits "structure/function" statements, under certain
conditions and (iii) permits under certain conditions the use of published
literature in connection with the sale of herbal products. Dietary supplements
do not require approval by FDA prior to marketing but are nevertheless subject
to various regulatory requirements concerning their composition, permissible
claims (including substantiation of any claims), manufacturing procedures
approval and other elements. DSHEA prohibits marketing dietary supplements
through claims for, or with intended uses in, the treatment or prevention of
disease. The FDA has issued regulations to implement certain labeling
requirements of DSHEA.
The Company's present activities relating to therapeutic pharmaceuticals,
including toxicology testing and clinical trials, are subject to regulation by
the FDA and other governmental authorities in the United States and other
countries. The process of obtaining required regulatory approvals from the FDA
and other authorities often takes many years, is expensive and can vary
substantially based on the type, complexity and novelty of the product. While
the Company believes that it may be able to pursue a less time consuming
development process in the U.S. and certain foreign jurisdictions, the Company
nevertheless will be required to engage in extensive clinical testing in order
to demonstrate the safety and efficacy of its pharmaceutical products for human
use and there can be no assurance of quick approval or any approval. Requests
for additional data, or failure to or delays in obtaining regulatory approvals
by the Company, its collaborators or licensees, would adversely affect the sales
of pharmaceutical products developed by the Company and the Company's ability to
generate pharmaceutical product revenues or royalties.
Development of a pharmaceutical for human use is generally a multi-step
process. In general, animal and IN VITRO testing must establish the potential
safety and efficacy of the experimental product in a given disease. Once a
product has been found to be reasonably safe and potentially efficacious in
animals, suggesting that human testing would be appropriate, an investigational
new drug (an "IND") application is submitted to the FDA. FDA acceptance
typically is granted or denied within 30 days of an IND submission, but may, in
some circumstances, involve substantial delays. Based upon documentation in
medical literature of safe use of botanical products derived from the same
botanical sources as the Company's products, the Company anticipates conducting
concurrently with clinical trials certain development steps that are
traditionally "pre-clinical."
Generally, clinical investigations involve three phases. FDA regulated Phase
I clinical studies are conducted to evaluate the safety of the experimental
product in humans, various routes, dosages and schedules of product
administration, and if possible, to gain early evidence of effectiveness. The
demonstration of therapeutic benefit is not generally required in order to
complete Phase I studies successfully. If acceptable product safety is
demonstrated, Phase II studies are initiated. The FDA has stated in pre-IND
meetings with the Company that it may permit companies to proceed directly to
Phase II clinical studies, while concurrently performing toxicology studies, for
botanical drugs that have demonstrated safety through prior use and has
permitted the Company to proceed directly with Phase II studies for its
PPRT-321. Phase II trials are designed to evaluate the safety and effectiveness
of the product in the treatment of a given disease and, typically, are
well-controlled, closely monitored studies conducted on a relatively small
number of patients. The optimal routes, dosages and schedules of administration
should be determined in these studies. When the Phase II trials are successfully
completed, Phase III studies are typically commenced. Phase III studies are
expanded, controlled trials that are intended to gather pivotal
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information about safety and efficacy in order to evaluate the overall
risk/benefit relationship of the experimental product and provide an adequate
basis for physician labeling. These studies may also compare the safety and
efficacy of the experimental product with currently available products. It is
not possible to estimate the time in which FDA regulated Phase I, II and III
studies will be completed with respect to a given product, although the time
period could be lengthy.
The results of initial toxicology and clinical testing are not necessarily
predictive of results that will be obtained from subsequent or more extensive
toxicology and clinical testing, and there can be no assurance that further
clinical trials or toxicology studies will be successful. Companies in the
pharmaceutical industry have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials. Although the FDA has
established a "botanical" committee to provide regulatory guidelines, including
guidelines for approval of herbal medicines as pharmaceuticals, the Company
believes that the FDA has never approved a multi-molecule, herbal
pharmaceutical. Standards approved by the FDA for approval of herbal medicines
that qualify as pharmaceuticals could result in competitive herbal medicines
that are not developed using the PharmaPrint Process.
Following the successful completion of clinical investigations, the
toxicology and clinical evidence that has been accumulated is submitted to the
FDA as part of a new drug application (a "NDA"). Approval of a NDA is necessary
before a company may market a new drug product. The approval, if any, of a NDA
can take several years and depends upon the time it takes the FDA to review the
submitted data, the FDA's comments on the application and the time required to
provide satisfactory answers or additional data when requested.
Continued compliance with cGMP is required to be eligible to continue to
manufacture and market the products once they are approved. Failure to comply
with cGMP regulations, or to comply with other applicable legal requirements,
can lead to federal seizure of violative products, injunctive actions brought by
the federal government, and potential criminal liability on the part of the
Company and of the officers and employees of the Company who are responsible for
the activities that lead to the violations.
In addition to the regulatory framework for pharmaceutical product
approvals, the Company is and may be subject to regulation under local, state,
federal and foreign law, including requirements regarding occupational safety,
laboratory practices and environmental protection, waste and water disposal, and
hazardous substance control. There can be no assurance that the Company will not
be required to incur significant costs to comply with such regulations as
manufacturing is increased to commercial volumes, or that the operations,
business, or assets of the Company will not be materially and adversely affected
by current or future laws, rules, regulations and policies.
INTELLECTUAL PROPERTY
The Company's policy is to protect its technology by, among other things,
filing patent applications in the United States and internationally, for
technology which it considers important to the development of its business. The
Company intends to file additional patent applications, when appropriate,
relating to new developments or improvements in its technology and other
specific products that it develops. The Company also relies on trade secrets and
improvements, unpatented know-how and/or continuing technological innovation to
develop and maintain its competitive position.
The Company plans to achieve a competitive advantage as the only provider of
multi-molecule botanical dietary supplements and pharmaceuticals that can market
its products on the basis of consistent composition, the presence of at least
one bioactive and proven bioactivity. This depends upon its ability to obtain a
patent covering the PharmaPrint Process that is broad enough to prevent
competitors from making such claims. The Company has filed with the PTO
applications for a broad process patent covering a method for making
pharmaceutical-grade botanicals that incorporates the steps that make up the
PharmaPrint Process, as well as additional applications covering the application
of this method to the
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manufacture of 11 specific botanical compositions. To date, the Company has not
received any patents or notice of allowance of any patent application for the
PharmaPrint Process or any products it currently intends to commercialize. A
great deal of research and development work has taken place in botanicals,
including efforts focused on single-molecule bioactivity and analysis of
multiple botanical components. The Company believes the PharmaPrint Process is
unique and patentable because of its focus on determining pharmaceutical grade
botanicals by identifying bioactive components having activity relevant to
clinical indications and establishing manufacturing standards covering the range
of bioactivity of the total of said components, but it is arguable that prior
work on bioactivity relating to the development of single molecule drugs or
multi-molecule chemical composition analysis could contradict novelty or
nonobviousness of the Company's invention. The PTO's initial response to one of
the Company's patent applications covering the PharmaPrint Process was an office
action dated November 1997 in which the patent examiner questioned the
patentability of the claims set forth in the application, asserting that they
are anticipated by prior art focused on separation of plant extracts into
components and identification of biologically active components, and also
reflect the well-known process of preparation of standardized extracts to ensure
product consistency. A search by the European Patent Office in response to a
related patent application produced similar results. Many patent applications
encounter similar office actions and ultimately result in issuance of a patent,
and the Company believes that the cited prior art can be adequately
distinguished on the basis of the Company's focus on determining pharmaceutical
grade botanicals through bioactivity as described above. The Company intends to
pursue its patent claims and believes that it will overcome the examiner's
issues. However, there can be no assurance that a patent covering the
PharmaPrint Process will issue or that prior art will not support a challenge to
any patent that issues. Lack of such a patent will impair the Company's ability
to protect its pharmaceutical products and compete successfully in the dietary
supplements market.
Many of the processes and much of the know-how of importance to the
Company's technology depend upon the non-patentable skills, knowledge and
experience of its scientific and technical personnel and collaborators. In
addition, certain of the Company's proprietary technology is held by the Company
as trade secrets. The Company's success will depend in part on its ability to
protect such trade secrets. To help protect its rights, the Company employs
various methods, such as requiring all employees, collaborators and significant
consultants and advisors to enter into confidentiality agreements with the
Company. There can be no assurance, however, that these agreements will provide
adequate protection for the Company's trade secrets, know-how or proprietary
information in the event of any unauthorized use or disclosure or that other
companies will not acquire or independently develop information the Company
considers to be proprietary.
The Company's success will depend, in part, on its ability to continue to
obtain patent protection for its technologies and products, to preserve its
trade secrets and to operate without infringing on the proprietary rights of
third parties.
In March 1995, the Company entered into a license agreement (the "License
Agreement") with the University of Southern California ("USC") that grants the
Company an exclusive, worldwide license to its rights in the PharmaPrint
Process. USC has also agreed to grant the Company the right to sublicense
certain products and a right of first refusal to obtain a license for any
improvements to certain products developed by USC. The term of the License
Agreement began March 1, 1995, and ends on the later of February 28, 2010, or
the expiration of the last issued patent under the License Agreement. In
exchange for the license, the Company agreed to pay USC: (i) royalty payments of
1% of the Company's net sales of pharmaceutical products developed using the
PharmaPrint Process, (ii) after the first patent issues, an annual minimum
royalty of $15,000, which shall increase by $5,000 annually for the following
two years and be $25,000 annually thereafter, (iii) an annual license fee of
$10,000 payable until a patent issues, and (iv) 328,563 shares of the Company's
common stock at the time of the exchange.
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RAW MATERIALS
The Company procures the botanical extracts necessary for development of its
dietary supplements and pharmaceuticals products primarily from Hauser and
Indena SpA. The Company believes that there are numerous alternative sources
throughout the United States, Europe and Asia from which the Company can obtain
these botanical extracts.
EMPLOYEES
As of January 1, 1998, the Company had 21 employees, of which eight are
engaged in research and development activities and 13 are engaged in general and
administrative functions. The Company contracts with external entities for many
of the services it requires, including research and development, regulatory and
manufacturing services.
FACILITIES
The Company's headquarters currently occupy approximately 6,800 square feet
in Irvine, California. The Company leases its headquarters facility for
approximately $14,500 per month, pursuant to a lease agreement that expires in
December 1998. The Company does not have any laboratory, research or
manufacturing facilities of its own.
LEGAL PROCEEDINGS
Other than as described below, the Company is not presently involved in any
legal proceeding.
The Company filed an action against Costas Loullis, Ph.D., the Company's
former Group Senior Vice President of Research and Development, in December
1997, in Superior Court in the County of Orange, State of California. The
Company's action alleges, among other things, conversion and misappropriation of
Company property, fraud, breach of fiduciary obligations and related damages and
stems from Dr. Loullis' employment with the Company from September 1996 through
October 1997 and the termination of that employment. Dr. Loullis filed a
response and a cross-complaint to the Company's action. The cross-complaint
contains claims for unpaid wages, accrued benefits, stock option rights, breach
of contract, wrongful termination and ownership rights in the Company's pending
patent applications. The Company believes that the claims asserted by Dr.
Loullis have limited merit, if any, and intends to dispute any and all claims
raised by Dr. Loullis vigorously. The Company does not believe this matter
represents a significant risk of material liability to the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
Elliot P. Friedman................. 44 Chairman of the Board of Directors and Chief Executive Officer
Robert J. Burgess.................. 49 President and Chief Operating Officer
Tasneem A. Khwaja, Ph.D............ 61 Chief Scientific Officer, Corporate Secretary and Director
Joel Bresser, Ph.D................. 43 Senior Vice President--DSHEA Products
Paul Johnston, Ph.D................ 47 Senior Vice President of Development
Michael Tempesta, Ph.D............. 45 Senior Vice President of Research
Phillip G. Trad.................... 49 Senior Vice President, General Counsel and Director
James R. Wodach.................... 36 Senior Vice President and Chief Financial Officer
John H. Abeles, M.D................ 52 Director
Lyle Anderson...................... 42 Director
Howard R. Asher.................... 50 Director
Nathan F. Troum, M.D............... 77 Director
</TABLE>
ELLIOT P. FRIEDMAN joined the Company as Chief Financial Officer and a
Director in November 1994 and became President and Chief Executive Officer in
October 1995 and Chairman of the Board of Directors in April 1997. From July
1990 to July 1994, Mr. Friedman was co-founder and Chief Executive Officer of
BioTek Solutions, a provider of monoclonal antibody and DNA-based systems used
by pathologists for the diagnosis of cancer. Mr. Friedman received a Science of
Management degree from the Massachusetts Institute of Technology.
ROBERT J. BURGESS joined the Company as Executive Vice President and Chief
Operating Officer in May 1996 and became President and Chief Operating Officer
in April 1997. From April 1995 to April 1996, Mr. Burgess provided full-time
consulting services to the Company. From April 1994 to April 1995, Mr. Burgess
served as Chief Operating Officer of Dimension Memory, Inc. ("Dimension Memory")
a company that trades in computer microchips. From February 1993 to April 1994,
Mr. Burgess served as Chief Executive Officer of J. Micro Trading, an Australian
company that trades in computer microchips. From January 1991 to January 1993,
he was Chief Operating Officer of Integrated Memory Systems, which manufactured
computer memory modules.
TASNEEM A. KHWAJA, PH.D. is founder of the Company and has served as
Secretary of the Company since its inception in 1994 and Chief Scientific
Officer since October 1995. From September 1994 to April 1997, Dr. Khwaja served
as Chairman of the Board of Directors and from November 1994 to October 1995
served as President and Chief Executive Officer of the Company. Dr. Khwaja has
been an Associate Professor of Pathology at the USC School of Medicine since
1973. Dr. Khwaja received a Ph.D. in Organic Chemistry and Chemistry of Nucleic
Acids from Cambridge University.
JOEL BRESSER, PH.D. joined the Company as Senior Vice President of DSHEA
Products in October 1997. From October 1995 to October 1997, Dr. Bresser was the
founder and owner of Intellihance, Inc., a consulting company that provides
strategic, marketing and technical services to healthcare and biotechnology
companies. From January 1989 to October 1995, Dr. Bresser served in various
executive capacities at Aprogenex, Inc., including President and Chief Executive
Officer from April 1992 to October 1995. Dr. Bresser received a Ph.D. in
Molecular Biology from Rice University.
PAUL JOHNSTON, PH.D. joined the Company as Vice President of Development in
March 1997. From February 1995 to March 1997, Dr. Johnston was an independent
consultant to a number of biotechnology
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start-up companies. From July 1993 to February 1995, Dr. Johnston served as the
Vice President of the Product Development Division of NeXstar Pharmaceuticals,
Inc. From September 1990 to July 1993, he was Senior Director of Pharmaceutical
Development of Amylin Pharmaceutical, Inc. and prior to that held senior
positions at Molecular Devices Corporation and Genentech Incorporated. Dr.
Johnston received a Ph.D. in Biochemistry from Brandeis University.
MICHAEL TEMPESTA, PH.D. joined the Company as Senior Vice President of
Research in March 1997. Immediately prior to joining the Company, Dr. Tempesta
was the Chief Scientific Officer of Larex, Inc., a biotechnology company, from
February 1995 to February 1997 and was also an independent consultant of NatProd
Consulting Services from January 1995 to February 1997. From 1990 to 1994, Dr.
Tempesta served as Chief Scientific Officer and in various executive positions
at Shaman Pharmaceuticals, Inc. Dr. Tempesta received his Ph.D. in Organic
Chemistry from the University of Arizona.
PHILLIP G. TRAD has been a Director of the Company since November 1995 and
Senior Vice President and General Counsel since November 1997. From 1988 to
November 1997, Mr. Trad operated his own law practice in California. Mr. Trad
has more than 17 years of experience in general, civil and commercial
litigation.
JAMES R. WODACH, CPA joined the Company as Senior Vice President and Chief
Financial Officer in December 1996. From April 1996 to December 1996, Mr. Wodach
was Director of Finance for Paragon Biomedical, Inc. From October 1995 to April
1996, he was an independent consultant. From April 1994 to October 1995, Mr.
Wodach was Senior Vice President Finance, from April 1993 to April 1994 Senior
Vice President and Chief Financial Officer, from July 1992 to April 1993 Vice
President Finance, and from November 1989 to July 1992 Controller for Regency
Health Services, Inc.
JOHN H. ABELES, M.D. has been a Director of the Company since August 1996.
Dr. Abeles has served as President of MedVest, Inc., a venture capital and
consulting firm, since 1980. He serves as a director of Encore Medical Corp.,
I-Flow Corporation, DUSA Pharmaceuticals, Inc. and Oryx Technology, Inc.
LYLE ANDERSON has been a Director of the Company since August 1996. Mr.
Anderson has been a private investor and financial consultant for the past 17
years. He serves as a principal in several privately held entities and provides
financial consulting to a large number and variety of ventures.
HOWARD R. ASHER has been a Director of the Company since August 1996. Mr.
Asher is the founder and serves as Chairman and CEO of ABA, a clinical research
organization that provides FDA strategic consulting and professional services.
He served as President of ABA from 1979 to 1996, and Chief Executive Officer of
ABA since 1996. Mr. Asher is Regulatory Affairs Certified by the Regulatory
Affairs Professional Society for Regulatory Affairs.
NATHAN F. TROUM, M.D. has been a Director of the Company since August 1996.
Since 1946, Dr. Troum has engaged in private medical practice specializing in
general medicine and rheumatology.
Each Director is elected for a period of one year at the Company's Annual
Meeting of Shareholders. Officers are elected by and serve at the discretion of
the Board of Directors.
Each non-employee Director of the Company receives $2,500 for each Board
meeting attended in person and $1,750 for any telephonic meeting of the Board of
Directors. In addition, pursuant to the Company's 1995 Stock Option Plan, each
non-employee Director annually receives options to purchase 10,000 shares of
Common Stock, although Dr. Abeles and Mr. Asher have agreed that in connection
with their initial appointment to the Board of Directors in August 1996, the
Company would issue each of them options to purchase 75,000 shares of Common
Stock, such options to vest over three years, in lieu of an additional grant of
options to purchase 10,000 shares pursuant to the 1995 Stock Option Plan in
years two and three of their services, if elected. In addition, non-employee
Directors who expend significant amounts of time in service of the Compensation
Committee and/or the Audit Committee are entitled to receive an additional grant
of options to purchase 20,000 shares of Common Stock. The options to purchase
Common
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Stock are granted at the fair market value of the Common Stock on the date of
grant. The options are subject to certain vesting requirements and expire ten
years from the date of grant.
BOARD OF SCIENTIFIC ADVISORS
The Company's Board of Scientific Advisors, comprised of distinguished
physicians and research scientists, provides advice to the Company in connection
with the Company's research and development and clinical trials.
IVOR RALPH EDWARDS, M.D. Dr. Edwards has been a member of the Board of
Scientific Advisors of the Company since July 1995. As professor and Director of
Drug Monitoring for the World Health Organization's ("WHO's) Collaborating
Centre for International Drug Monitoring in Uppsala, Sweden, Dr. Edwards is
responsible for worldwide monitoring of adverse effects of pharmaceuticals and
natural medicines. Using information collected from physicians, hospital and
worldwide regulatory agencies, he has created a data archive of 1.5 million
records, which is used by regulatory agencies around the world. Additionally,
Dr. Edwards reviews pharmaceutical product applications as a consultant to the
Swedish Medical Products Agency. Dr. Edwards was trained in general internal
medicine and clinical pharmacology and holds FRCP (London, United Kingdom) and
FRACP qualifications. Prior to being appointed Director of Drug Monitoring at
WHO's Collaborating Centre for International Drug Monitoring, Dr. Edwards
chaired the Advisory Group to the Centre. He has also been a Medical Assessor
for Adverse Drug Reactions for the New Zealand Ministry of Health and External
Examiner in Clinical Pharmacology at the University of Zimbabwe and at the
University of Capetown in South Africa.
TOSHIKAZU OKI, PH.D. Dr. Oki has been a member of the Board of Scientific
Advisors of the Company since April 1995. From 1981 to 1993, Dr. Oki held senior
leadership positions in Pfizer and Bristol-Meyers pharmaceutical corporations,
and was Senior Vice President of Bristol-Meyers Research Institute and President
and Director of Bristol-Meyers Research Institute in Japan from December 1989 to
May 1993. He has nearly 40 years of pharmaceutical industry experience in
preclinical pharmacology and drug development of novel anti-cancer agents
obtained from natural and fermentation sources. Dr. Oki has more than 260
publications and holds 90 patents. He currently is a Professor of Exploratory
Biotechnology Research at Toyama Prefectural University in Toyama, Japan.
RANDOLPH C. STEER, M.D., PH.D. Dr. Steer has been a member of the Board of
Scientific Advisors of the Company since October 1996. Dr. Steer has been an
independent pharmaceutical and biotechnology consultant since 1989 and has a
broad background in business development, medical marketing, and regulatory and
clinical affairs, having served as a consultant to many corporations in the
United States and abroad. In addition, he has advised numerous venture capital
firms and investment banks on the development of drugs, biologics, diagnostics
and medical devices. Dr. Steer received his M.D. from the Mayo Medical School
and his Ph.D. from the University of Minnesota. He completed a residency and
subspecialty fellowship in clinical and chemical pathology at the University of
Minnesota Hospitals in Minneapolis. He has served as associate director of
medical affairs at Marion Laboratories; medical director at Ciba Consumer
Pharmaceuticals, Ciba-Geigy Corporation; senior vice president at the Physicians
World Communications group and Chairman, President and Chief Executive Officer
of Advanced Therapeutics Communications International, a leading drug regulatory
group serving the United States, Europe and Japan. Dr. Steer serves on the Board
of Directors of BioCryst Pharmaceuticals, Techne Corporation, Maret, Inc.,
Kimeragen, Inc., and IgX Ltd. and on the scientific advisory boards of Osiris
Therapeutics, Inc., Geltex Pharmaceuticals, and NaPro Biotherapeutics.
CLIVE R. TAYLOR, M.D., PH.D. Dr. Taylor has been a member of the Board of
Scientific Advisors of the Company since April 1995. Dr. Taylor is currently a
Professor and Chairman of the Department of Pathology and Laboratory Medicine at
the USC School of Medicine. Dr. Taylor is the Director of Laboratories and
Pathological Services at the Los Angeles County-USC Medical Center. He is also
the President of the American Association of Pathologists, which is comprised of
the Pathology Department
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Chairmen of all the medical centers in the United States, was President of the
Biological Stain Commission and is responsible for advising the FDA on
guidelines for reagents used in diagnosing biopsies. Dr. Taylor has written over
270 articles and 12 books, many of which have been translated for foreign
distribution. Prior to joining USC in 1976, he was a lecturer in the Department
of Pathology at Oxford University in the United Kingdom. He holds a Ph.D. in
immunopathology from Oxford University and an M.D. from Cambridge University.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
LIMITATION OF DIRECTOR'S LIABILITY.
The Company's Certificate of Incorporation eliminates the liability of
directors to the fullest extent permissible under Delaware law. Delaware law
permits a corporation to limit the personal liability of a director to the
corporation or its shareholders for monetary damages for breach of certain
fiduciary duties as a director, provided, that the director's liability may not
be eliminated or limited for (a) breaches of the director's duty of loyalty to
the corporation or its shareholders; (b) acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law; (c) the payment
of unlawful dividends or unlawful stock repurchases or redemptions; or (d)
transactions in which the director received an improper personal benefit. A
director's liability may also not be limited for violation of, or otherwise
relieve the corporation or its directors from the necessity of complying with,
federal or state securities laws or affect the availability of non-monetary
remedies such as injunctive relief or rescission.
INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's bylaws relating to indemnification require that the Company
indemnify its directors and its executive officers to the fullest extent
permitted under Delaware law, provided, that the Company may modify the extent
of such indemnification by individual contracts with its directors and executive
officers, and provided, further, that the Company will not be required to
indemnify any director or executive officer in connection with a proceeding
initiated by such person, with certain exceptions. Delaware corporate law, the
Company's bylaws, as well as any indemnity agreements, may also permit
indemnification for liabilities arising under the Securities Act or the
Securities Exchange Act of 1934, as amended. Without limiting any right an
indemnity may have under Delaware corporate law and the Company's bylaws, the
Board of Directors has adopted an Indemnification and Hold Harmless Agreement
("Indemnity Agreement") to provide additional indemnification and reimbursement
to all qualified directors and officers of the Company, and to hold such
directors and officers harmless from certain liabilities, judgments and related
expenses. Any individual who is a duly elected or appointed member of the Board
of Directors, a corporate officer of the Company or any employee or agent as
approved by the Board of Directors is deemed a person who qualifies as an
indemnity under the Indemnity Agreement.
The Board of Directors has been advised that, in the opinion of the
Securities and Exchange Commission, indemnification of liabilities arising under
the Securities Act of 1933, as amended, is contrary to public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director or officer of
the Company in the successful defense of any action, suit or proceeding) is
asserted by such director or officer in connection with the shares being
registered hereby, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
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EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS
The Summary Compensation Table below sets forth information for services in
all capacities paid or accrued for the fiscal years ended March 31, 1997 and
1996 and the period from inception (September 15, 1994) to March 31, 1995 by the
Company to its Chief Executive Officer and the other executive officers whose
total annual compensation exceeded $100,000 for such fiscal years and period
(the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------- LONG-TERM
FISCAL COMPENSATION AWARDS
YEAR AND ---------------------------
PERIOD SECURITIES ALL OTHER
ENDED UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION MARCH 31 SALARY($) BONUS($) OPTIONS ($)
-------- ---------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Elliot Friedman............................. 1997 $ 170,663(1) $ 50,000(2) -- $ --
Chairman of the Board of Directors 1996 89,333 -- 712,708(3) --
and Chief Executive Officer 1995 22,500 -- --
Robert J. Burgess........................... 1997 163,335(4) 50,000(2) 712,708(5) --
President and Chief Operating 1996 87,687 -- -- --
Officer 1995 -- -- -- --
Tasneem A. Khwaja, Ph.D..................... 1997 167,163(1)(6) -- -- --
Chief Scientific Officer and 1996 87,633(6) -- -- --
Secretary 1995 23,000(6) -- -- --
</TABLE>
- ------------------------
(1) Amount includes payments representing deferred salary pursuant to Employment
Agreements between the Company and each of Mr. Friedman and Dr. Khwaja. As
regards to Mr. Friedman and Dr. Khwaja, such deferred payments were $39,863
each, and were paid upon consummation of the Company's initial public
offering. See "Employment and Personal Services Agreements."
(2) Amount represents payments made pursuant to a discretionary bonus.
(3) Pursuant to an Agreement between the Company, Dr. Khwaja and Mr. Friedman
dated as of May 8, 1996, these options were canceled in connection with the
issuance of 712,708 shares of Common Stock to Mr. Friedman.
(4) Represents amounts paid by the Company to Dimension Memory which, from May
1996 to September 1997, provided the services of Robert J. Burgess as
President and Chief Operating Officer pursuant to a Personal Services
Agreement between the Company and Dimension Memory. In December 1996, the
Company amended its agreement with Dimension Memory. The amended agreement
provided for the accelerated payment by the Company of all amounts due under
the Personal Services Agreement in exchange for Dimension Memory agreeing to
provide additional services to the Company. As a result, the Company paid
Dimension Memory the sum of $312,000. Of the $312,000 paid to Dimension
Memory, $35,000 relating to services provided by Dimension Memory to the
Company for the period January 1997 through March 1997 is included, and
$266,000 paid for services to be provided from April 1997 through December
1998 is not included. This amount also includes $50,000 of deferred payments
pursuant to such Personal Services Agreement, were paid upon
45
<PAGE>
consummation of the Company's initial public offering. See "Employment and
Personal Services Agreements."
(5) These options were granted to Dimension Memory pursuant to a consulting
agreement between the Company and Dimension Memory and were canceled in
connection with the issuance of 712,708 shares of Common Stock to Dimension
Memory for services to be rendered by Dimension Memory pursuant to the
Personal Service Agreement.
(6) Does not include approximately $70,000 annual salary paid by USC to Dr.
Khwaja as a professor. Approximately $30,000 of such salary was paid
indirectly through payment by the Company to USC of the amount required by a
Research Agreement between the Company and USC, which agreement has been
terminated.
EMPLOYMENT AND PERSONAL SERVICE AGREEMENTS
The Company has entered into an employment agreement with Elliot P.
Friedman, effective September 1, 1997, that agreement expires on August 30,
2000. The agreement provides for an annual base salary of $182,000 and if Mr.
Friedman's employment is terminated without cause or by Mr. Friedman on the
basis of a breach by the Company, the Company is obligated to pay Mr. Friedman
the salary and benefits earned or accrued through the date of termination, and
within 30 days after termination, a lump sum of the present value of the salary
provided for by the agreement for the 12 months immediately following
termination. In the event of death or disability or if the agreement is
voluntarily terminated by Mr. Friedman, or terminated for cause by the Company,
the Company is obligated to pay only salary and benefits earned or accrued
through the date of termination.
The Company has entered into an employment agreement with Robert J. Burgess,
effective October 1, 1997, that has substantially similar terms as Mr.
Friedman's agreement described above, except that the agreement expires on
October 1, 2000. Prior to entering into such employment agreement, the Company
was party to a personal services agreement with Dimension Memory whereby,
Dimension Memory agreed to provide the services of Robert Burgess as an
executive officer of the Company. Such agreement has been deemed satisfied as of
October 1, 1997 and as a result the Company will recognize $190,000 of
compensation expense in the nine months ended December 31, 1997.
The Company has entered into an employment agreement with Tasneem A. Khwaja,
effective September 1, 1997, that expires on August 30, 2000. The agreement
provides for an annual base salary of $152,000 and if Dr. Khwaja's employment is
terminated without cause or if the termination is by Dr. Khwaja on the basis of
a breach by the Company, the Company is obligated to pay Dr. Khwaja the salary
and benefits earned or accrued through the date of termination and, within 30
days after termination, a lump sum of the present value of the salary provided
for by the agreement for the 12 months immediately following termination. In the
event of death or disability or if the agreement is voluntarily terminated by
Dr. Khwaja or terminated for cause by the Company, the Company is obligated to
pay only salary and benefits earned and accrued through the date of termination.
The Company also has entered into employment agreements with each of its
Senior Vice Presidents that provide for base salaries, the potential for the
payment of bonuses and severance payments of three months salary upon certain
terminations.
1995 STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "1995 Plan") provides for the
grant of options to directors, officers, key employees, consultants, scientific
advisors and other personnel working directly or indirectly for the Company. A
maximum of 2,200,000 shares of Common Stock is authorized for issuance under the
1995 Plan. The 1995 Plan is administered by the Board of Directors or a
committee of the Board of Directors (the "Plan Committee") comprised of
disinterested directors, i.e., directors who, during the
46
<PAGE>
one year prior to service on the Plan Committee were not granted or awarded
equity securities of the Company under the 1995 Plan or any other plan of the
Company, other than an automatic annual grant to each non-employee director of
the Company of options to purchase 10,000 shares of Common Stock at an exercise
price equal to the fair market value of the Common Stock on the date of the
grant. These automatic options vest over a one-year period. The options granted
under the 1995 Plan may be "incentive stock options" as defined in Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified
options. As determined by the Plan Committee, payment upon exercise of options
may be in cash or in the form of unrestricted Common Stock already owned by the
optionee, or, in the case of the exercise of a nonqualified option, in the form
of restricted stock. However, in the case of an incentive stock option, the
right to make payment in the form of already owned shares may be authorized only
at the time of grant.
Generally, the vesting, exercise and termination schedules of options other
than automatic non-employee director options are determined by the Board of
Directors or the Plan Committee at the time of grant, exercise price, but in no
event may the term of an option exceed ten years or the exercise price be less
than 100% of the fair market value of the Common Stock on the date of grant, and
in no event may the term of an incentive stock option granted under the 1995
Plan to a shareholder owning more than 10% of the combined voting power of all
classes of stock of the Company on the date of grant exceed five years and its
exercise price may not be less than 110% of the fair market value of the Common
Stock on the date of grant. Options may be exercised in whole or in part as
determined by the Plan Committee. Vesting generally ceases upon termination of
employment and vested options generally expire 12 months after termination of
employment, if not exercised.
As of the date of this Prospectus, the Company has granted options with
respect to an aggregate of 2,010,378 shares under the 1995 Plan, which options
have terms ranging from four to ten years and are currently exercisable at
exercise prices ranging from $0.96 to $16.00. The 1995 Plan was approved by the
Board of Directors of the Company on April 14, 1995, and was amended on August
19, 1997, and, unless sooner terminated by the Board of Directors or Plan
Committee, will terminate on April 14, 2005.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of December 31, 1997, certain information
known to the Company regarding the ownership of shares of Common Stock by (i)
each person known to the Company to be a beneficial owner of more than 5% of the
outstanding shares of Common Stock; (ii) each director, (iii) each Named
Executive Officers; and (iv) all executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP(3)
SHARES --------------------------
BENEFICIALLY BEFORE THE AFTER THE
NAME(1) OWNED(2) OFFERING OFFERING
- --------------------------------------------------------------- -------------------- ------------- -----------
<S> <C> <C> <C>
Tasneem A. Khwaja, Ph.D........................................ 2,699,822(4) 24.4% 21.5%
Elliot P. Friedman............................................. 2,105,248(5) 18.8% 16.6%
Robert J. Burgess.............................................. 1,956,248(6) 17.5% 15.4%
JadiJo, Inc.(7)................................................ 115,270(8) 1.0% *
D-RAM Industries Pty. Ltd.(9).................................. 624,270(8) 5.6% 5.0%
Dimension Memory, Inc.(10)..................................... 557,708(8) 5.0% 4.4%
Phillip G. Trad................................................ 233,438(11) 2.1% 1.8%
John H. Abeles, M.D.(12)....................................... 56,875(13) * *
Lyle Anderson(14).............................................. 45,000(15) * *
Howard R. Asher(16)............................................ 76,875(17) * *
Nathan F. Troum, M.D.(18)...................................... 15,000(19) * *
All directors and executive officers as a group (12 people).... 7,370,589(20) 61.6% 54.7%
</TABLE>
The Company had 164 holders of record of its Common Stock as of December 31,
1997.
- ------------------------
* Less than one percent (1%).
(1) The address of each person listed in this table, except as otherwise noted,
is c/o PharmaPrint Inc., 4 Park Plaza, Suite 1900, Irvine, California 92614.
(2) As of December 31, 1997, the Company had 11,053,684 shares of Common Stock
issued and outstanding. Includes the beneficial ownership of shares that the
person has a right to acquire within sixty (60) days of December 31, 1997.
(3) Assumes 12,553,684 shares of Common Stock issued and outstanding after the
Offering and no exercise of the Underwriters' over-allotment option.
(4) Includes 104,045 shares to be transferred to John Kirch on August 14, 1998.
Also includes call options (obligations to sell) granted by Dr. Khwaja in
the amount of 200,000, 200,000, and 30,000 to Elliot P. Friedman, Robert J.
Burgess, and Dr. Khwaja's son, respectively.
(5) Includes options to purchase 150,000 shares of Common Stock. Does not
include 200,000 call options (options to purchase) granted to Mr. Friedman
by Dr. Khwaja. See footnote 4.
(6) Consists of 509,000, 115,270, 624,270, and 557,708 shares of Common Stock
owned of record by Mr. Burgess, JadiJo, Inc., D-RAM Industries Pty. Ltd.,
and Dimension Memory, respectively, also shown separately in this table.
Also includes options to purchase 150,000 shares of Common Stock. Does not
include 200,000 call options (options to purchase) granted to Mr. Burgess by
Dr. Khwaja. See footnote 4.
(7) The address of JadiJo, Inc. is 32, EDIF, J.J. Vallarino, 1st Floor, Office
3, Panama City, Panama.
(8) These shares are also included in the shares shown as beneficially owned by
Robert J. Burgess. These entities are controlled by various of the children
and/or sons-in-law of Mr. Burgess.
48
<PAGE>
(9) The address of D-RAM Industries Pty. Ltd. ("D-RAM") is 98 Edinborough
Street, Benowa Waters, Gold Coast, 4217, Queensland, Australia.
(10) The address of Dimension Memory, Inc. is 17 Baycove Lane, Newport Beach,
California 92661.
(11) Consists solely of options to purchase 233,438 shares of Common Stock.
(12) The address of Dr. Abeles is c/o MedVest, Inc., 2365 N.W. 41st Street, Boca
Raton, Florida 33431.
(13) Consists solely of options to purchase 56,875 shares of Common Stock.
(14) The address of Mr. Anderson is 900 Appolo, Suite 4, Houston, Texas 77058.
(15) Consists solely of options to purchase 45,000 shares of Common Stock.
(16) The address of Mr. Asher is c/o Advanced Bioresearch Associates, One
American Plaza, 600 West Broadway, Suite 900, San Diego, California 92101.
(17) Consists solely of options to purchase 76,875 shares of Common Stock.
(18) The address of Dr. Troum is 3878 43rd Street, San Diego, California 92105.
(19) Consists solely of options to purchase 15,000 shares of Common Stock.
(20) Includes beneficial ownership of Common Stock as follows: Tasneem A.
Khwaja, Ph.D.--2,699,822 shares; Elliot P. Friedman--1,955,248 shares; and
Robert J. Burgess--1,806,248 shares. Also includes options held by directors
and executive officers of the Company to purchase the following number of
shares of Common Stock: John H. Abeles, M.D.--56,875 shares; Lyle
Anderson--45,000 shares; Howard R. Asher--76,875 shares; Joel Bresser,
Ph.D.--5,833 shares; Elliot P. Friedman--150,000 shares; Phillip G.
Trad--233,438 shares; Nathan F. Troum--15,000 shares; Robert
Burgess--150,000 shares; Paul Johnston, Ph.D.--20,000 shares; Michael
Tempesta, Ph.D.--85,000 shares; and James R. Wodach--71,250 shares.
CERTAIN TRANSACTIONS
As of March 22, 1996, Mr. Friedman, JadiJo, Inc., a California corporation
("JadiJo"), Dr. Khwaja, Mr. Burgess, Dimension Memory, and D-RAM entered into a
shareholders agreement whereby Dr. Khwaja contributed 1,336,978 shares of Common
Stock to the Company as a capital contribution and the Company agreed to issue
624,270 shares of Common Stock to D-RAM, as nominee of Mr. Burgess, the
Company's then Executive Vice President and Chief Operating Officer, and options
to acquire 712,708 shares of Common Stock to Mr. Friedman, at an exercise price
of $0.96 per share. Subsequently, pursuant to an agreement dated as of May 8,
1996 among the Company, Dr. Khwaja, and Mr. Friedman, the options granted to Mr.
Friedman were canceled and he was issued 712,708 shares of Common Stock. In
September 1997, the underwriter of the Company's initial public offering
released a lock-up agreement with Mr. Friedman covering such shares.
In December, 1996, the Company amended its Personal Services Agreement with
Dimension to provide for the immediate payment by the Company of all amounts due
under the Personal Services Agreement in exchange for Dimension agreeing to
provide additional services to the Company. As a result of this amended
agreement, the Company paid Dimension $312,000. In 1997, Dimension agreed to
provide the services of Mr. Burgess as the Company's President and the Company
agreed to pay Dimension, effective March 1, 1997, at the rate of $36,000 per
year. In October 1997, the parties deemed that such Personal Services Agreement
was satisfied.
ABA is a clinical research organization that provides FDA strategic
consulting and professional services and provides guidance to the Company in
connection with various clinical, scientific, and regulatory matters. Mr. Howard
R. Asher, a member of the Company's Board of Directors, is the
49
<PAGE>
Chairman and Chief Executive Officer and a controlling shareholder of ABA. The
Company paid approximately $880,000 for the year ended March 31, 1997 for
services rendered by ABA.
There are no family relationships among the executive officers or directors
of the Company.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The following description of the Common Stock of the Company is subject to
the Delaware General Corporation Law and to the provisions contained in the
Company's Certificate of Incorporation, as amended, and bylaws, as amended,
copies of which have been filed as exhibits to the Registration Statement of
which this Prospectus is a part.
On October 2, 1997 the Company effected a reincorporation in Delaware. As a
result of this reincorporation, the Company increased its number of shares of
authorized Common Stock from 19,000,000 shares, without par value, to 24,000,000
shares, par value $0.001 per share. Currently there are 11,053,684 shares of the
Company's Common Stock outstanding; 300,000 shares of Common Stock are reserved
for issuance upon the exercise of a warrant held by the underwriter of the
Company's initial public offering; 2,200,000 shares of Common Stock are reserved
for issuance upon the exercise of options under the 1995 Plan; and 75,000 shares
of Common Stock are reserved for issuance upon the exercise of the
Representative's Warrants.
Each outstanding share of Common Stock is entitled to one vote, either in
person or by proxy, on all matters that may be voted upon by the registered
holders thereof at meetings of the shareholders.
The holders of Common Stock (i) have equal ratable rights to dividends from
funds legally available therefor, when, as and if declared by the Board of
Directors of the Company; (ii) are entitled to share ratably in all of the
assets of the Company available for distribution to holders of Common Stock upon
liquidation, dissolution or winding up of the affairs of the Company; (iii) do
not have preemptive, subscription or conversion rights, or redemption or sinking
fund provisions applicable thereto; and (iv) are entitled to one non-cumulative
vote per share on all matters on which shareholders may vote. All of the
outstanding shares of Common Stock are, and the shares offered hereby, when
issued against payment therefor in accordance with this Prospectus, will be
fully paid and nonassessable.
The Company has never declared or paid cash dividends on its capital stock,
and currently intends to retain any future earnings for use in the development
and operation of its business. Accordingly, the Company does not expect to pay
cash dividends in the foreseeable future.
PREFERRED STOCK
The Board of Directors has the authority, subject to any limitations
prescribed by law, without further action by the stockholders, to issue up to an
aggregate of 1,000,000 shares of Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions granted to or imposed
upon any unissued shares of Preferred Stock and to fix the number of shares
constituting any series and the designations of such series. The shares noted
above constitute "blank check" Preferred Stock, and, as of the date of this
Offering, the Board of Directors has not yet designated any series thereof or
any rights, preferences, privileges or restrictions attaching thereto. The
issuance of Preferred Stock could adversely affect the voting power of the
holders of Common Stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation and may have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no present plan to issue any Preferred Stock.
50
<PAGE>
WARRANTS; REGISTRATION RIGHTS
The Company has agreed to sell to the Representative of the Underwriters
warrants (the "Representative's Warrants") to purchase up to a number of shares
of Common Stock equal to 5% of the number of shares to be sold by the Company in
this Offering (excluding any shares sold pursuant to the Underwriter's
over-allotment option) at an exercise price per share equal to 120% of the Price
to Public in this Offering. The Representative's Warrants are exercisable for a
period of four years commencing one year after the effective date of the
Registration Statement of which this Prospectus forms a part, and will contain
certain demand and piggyback registration rights. See "Underwriting." In
connection with the Company's initial public offering, the Company sold to the
underwriter thereof warrants to purchase 300,000 shares of Common Stock at an
exercise price of $5.50 per share.
In addition, the Company has granted to holders of approximately 2,702,326
shares of Common Stock demand registration rights and piggyback registration
rights pursuant to which such holders may, under certain circumstances, (i)
require the Company to register such shares under the Act and (ii) have such
shares included in certain registration statements filed by the Company. The
Company has also granted the holders of approximately 649,192 additional shares
of Common Stock similar piggyback registration rights as those described above.
CERTAIN PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW
Generally, Section 203 of the Delaware General Corporation Law (the "DGCL")
prohibits a publicly held Delaware corporation from engaging in a broad range of
"business combinations" with an "interested stockholder" (defined generally as a
person owning 15% or more of the corporation's outstanding voting stock) for
three years following the date such person became an interested stockholder
unless (i) before the person becomes an interested stockholder, the transaction
resulting in such person becoming an interested stockholder or the business
combination is approved by the board of directors of the corporation, (ii) upon
consummation of the transaction resulting in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock of the corporation (excluding shares owned by directors
who are also officers of the corporation or shares held by employee stock plans
that do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender offer or exchange
offer) or (iii) on or after such date on which such person became an interested
stockholder, the business combination is approved by the board of directors and
authorized at an annual or special meeting, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock excluding
shares owned by the interested stockholders. The restrictions of Section 203 do
not apply, among other reasons, if a corporation, by action of its stockholders,
adopts an amendment to its certificate of incorporation or bylaws expressly
electing not to be governed by Section 203, provided that, in addition to any
other vote required by law, such amendment to the certificate of incorporation
or bylaws must be approved by the affirmative vote of a majority of the shares
entitled to vote. Moreover, an amendment so adopted is not effective until
twelve months after its adoption and does not apply to any business combination
between the corporation and any person who became an interested stockholder of
such corporation on or prior to such adoption. The Company's Certificate of
Incorporation and Bylaws do not currently contain any provisions electing not to
be governed by Section 203 of the DGCL.
Section 203 of the DGCL may discourage persons from making a tender offer
for or acquisitions of substantial amounts of the Common Stock. This could have
the effect of inhibiting changes in management and may also prevent temporary
fluctuations in the Common Stock that often result from takeover attempts.
Section 228 of the DGCL allows any action that is required to be or may be
taken at a special or annual meeting of the stockholders of a corporation to be
taken without a meeting with the written consent of holders of outstanding stock
having not less than the minimum number of votes that would be necessary
51
<PAGE>
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted, provided that the certificate of
incorporation of such corporation does not contain a provision to the contrary.
The Company's Certificate of Incorporation contains no such provision, and
therefore stockholders holding a majority of the voting power of the Common
Stock will be able to approve a broad range of corporate actions requiring
stockholder approval without the necessity of holding a meeting of stockholders.
Certain provisions of the Company's Bylaws may have the affect of
discouraging certain types of transactions that may involve an actual or
threatened change of control of the Company and encouraging any person who might
seek to acquire control of the Company to negotiate with the Company's Board of
Directors.
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent is Continental Stock Transfer & Trust Company.
The transfer agent is responsible for all record keeping and administrative
functions in connection with the Common Stock.
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, each of
the Underwriters named below, for whom CIBC Oppenheimer Corp. (the
"Representative") is acting as Representative, has severally agreed to purchase
from the Company, and the Company has agreed to sell to each Underwriter, the
respective number of shares of Common Stock set forth opposite the name of such
Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
CIBC Oppenheimer Corp............................................................
----------
Total........................................................................ 1,500,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to the approval of certain legal matters by
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any are taken.
The Underwriters propose to offer the shares of Common Stock directly to the
public initially at the public offering price set forth on the cover page of
this Prospectus and in part to certain securities dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
other brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the Representative.
The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 225,000 shares of Common Stock at the public offering price
less the underwriting discount set forth on the cover page of this Prospectus
solely to cover over-allotments, if any. If the Underwriters exercise such
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage of the over-allotment shares as
the number of original shares to be purchased by each of them bears to the
1,500,000 shares of Common Stock offered hereby.
The Company has also agreed to sell to the Representative or its designees,
for nominal consideration, warrants (the "Representative's Warrants") to
purchase a number of shares of Common Stock equal to 5% of the number of shares
sold by the Company in this Offering (excluding any shares sold pursuant to the
Underwriters' over-allotment option), at an exercise price per share equal to
120% of the public offering price. The exercise price may be paid in cash or on
a cashless net issuance basis by foregoing receipt of a number of shares
otherwise issuable upon exercise having a fair market value equal to the
aggregate exercise price. The Representative's Warrants are exercisable for a
period of four years, commencing one year after the effective date of the
Registration Statement of which this Prospectus forms a part. Holders of the
Representative's Warrant will have certain demand and piggyback registration
rights with respect to the shares of Common Stock issuable upon exercise
thereof. The Representative's Warrants will be restricted from sale, transfer or
hypothecation for a period of one year from the effective date, except to
officers and partners of the Representative. The exercise price and the number
of shares issuable upon exercise may, under certain circumstances, be subject to
adjustment pursuant to antidilution provisions.
53
<PAGE>
The Company has agreed to indemnify the Representative and the several
Underwriters against certain liabilities, including, without limitation,
liabilities under the Securities Act, and to contribute to certain payments that
the Underwriters may be required to make in respect thereof. The Company has
also agreed to reimburse the Underwriter for certain out-of-pocket expenses
incurred in connection with the Offering.
In connection with this Offering, the Underwriters and other selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M under the Exchange Act, pursuant to which such
persons may bid for or purchase Common Stock for the purpose of stabilizing its
market price. The Underwriters also may create a short position for the account
of the Underwriters by selling more Common Stock in connection with the Offering
than they are committed to purchase from the Company, and in such case may
purchase Common Stock in the open market following completion of the Offering to
cover all or a portion of such short position. The Underwriters may also cover
all or a portion of such short position, up to 225,000 shares of Common Stock,
by exercising the Underwriters' over-allotment option referred to above. In
addition, CIBC Oppenheimer Corp., on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby it
may reclaim from an Underwriter (or dealer participating in the Offering) for
the account of the other Underwriters, the selling concession with respect to
Common Stock that is distributed in the Offering but subsequently purchased for
the account of the Underwriters in the open market.
In connection with this Offering, certain Underwriters may engage in passive
market making transactions in the Common Stock on the Nasdaq National Market in
accordance with Rule 103 of Regulation M under the Exchange Act. Passive market
making consists of displaying bids on the Nasdaq National Market limited by the
bid prices of independent market makers and making purchases limited by such
prices. Net purchases by a passive market maker are limited to a specific
percentage of the passive market maker's average daily trading volume in the
Common Stock during a specified period and must be discontinued when such limit
is reached.
Any of the stabilization or passive market making transactions described
above may result in the maintenance of the price of the Common Stock at a level
above that which might otherwise prevail in the open market, although no
representation is made regarding the direction or magnitude of any effect that
these transactions may have on the market price of the Common Stock. None of the
stabilization or passive market making transactions described above is required,
and, if they are undertaken, they may be discontinued at any time.
The Company's executive officers and directors, who collectively own an
aggregate of approximately 6,461,318 issued shares, of which 910,150 shares may
be subject to sale pursuant to margin agreements and lines of credit between the
officers of the Company and an investment bank, and 1,388,438 shares issuable
upon exercise of outstanding options, have agreed that they will not directly or
indirectly sell, offer, contract to sell, assign, transfer, encumber, grant an
option to purchase, or otherwise dispose of any shares of Common Stock
beneficially owned (within the meaning of Rule 13d-3 of the Exchange Act) by
them, for 180 days (and with respect to 200,000 shares, 120 days) after the date
of the Underwriting Agreement, without the prior written consent of CIBC
Oppenheimer Corp., subject to certain limited exceptions. The Company has also
agreed not to issue, sell or register with the Commission, or otherwise dispose
of directly or indirectly, any equity securities of the Company (or any
securities convertible into or exercisable or exchangeable for equity securities
of the Company) for a period of 180 days after the date of the Underwriting
Agreement, without the prior written consent of CIBC Oppenheimer Corp., subject
to certain limited exceptions. CIBC Oppenheimer Corp. may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements.
54
<PAGE>
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Klehr, Harrison, Harvey, Branzburg & Ellers LLP, Philadelphia,
Pennsylvania. Certain legal matters are being passed upon for the Underwriters
by Gibson, Dunn & Crutcher LLP, Orange County, California.
EXPERTS
The balance sheet of the Company as of March 31, 1997, and the related
statements of operations, shareholders' equity and cash flows for the years
ended March 31, 1996 and 1997 and the period from inception (September 15, 1994)
to March 31, 1997 included in this Prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
in reliance upon the authority of said firm as experts in giving said report.
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accounts...................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statements of Shareholders' Equity......................................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of PharmaPrint Inc.:
We have audited the accompanying balance sheet of PharmaPrint Inc. (a
California corporation in the development stage) as of March 31, 1997 and the
related statements of operations, shareholders' equity, and cash flows for the
years ended March 31, 1996 and 1997 and for the period from inception (September
15, 1994) to March 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above represent fairly,
in all material respects, the financial position of PharmaPrint Inc. as of March
31, 1997 and the results of its operations and its cash flows for the years
ended March 31, 1996 and 1997 and for the period from inception (September 15,
1994) to March 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Orange County, California
May 2, 1997
F-2
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------- SEPTEMBER 30,
1997
--------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 8,170,072 $ 3,281,188
Other current assets............................................................ 337,593 329,859
-------------- --------------
Total current assets.......................................................... 8,507,665 3,611,047
EQUIPMENT, NET.................................................................... 185,571 216,752
OTHER ASSETS, net of accumulated amortization of $8,110 at March 31, 1997 and
$47,269 at September 30, 1997................................................... 138,684 225,165
-------------- --------------
Total assets.................................................................. $ 8,831,920 $ 4,052,964
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 927,773 $ 674,570
Accrued expenses................................................................ 166,823 217,184
-------------- --------------
Total current liabilities..................................................... 1,094,596 891,754
-------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value--1,000,000
shares authorized, no shares issued or outstanding............................ -- --
Common stock, without par value--19,000,000 shares authorized, 11,000,000 and
11,005,202 shares issued and outstanding as of March 31, 1997 and September
30, 1997, respectively........................................................ 22,826,898 23,410,972
Additional paid in capital...................................................... 1,130,370 1,130,370
Deferred compensation........................................................... (3,158,899) (114,433)
Deficit accumulated during the development stage................................ (13,061,045) (21,265,699)
-------------- --------------
Total shareholders' equity.................................................... 7,737,324 3,161,210
-------------- --------------
Total liabilities and shareholders' equity.................................... $ 8,831,920 $ 4,052,964
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
MARCH 31, PERIOD FROM INCEPTION SEPTEMBER 30,
-------------------------- (SEPTEMBER 15, 1994) --------------------------
1996 1997 THROUGH MARCH 31, 1997 1996 1997
----------- ------------- ---------------------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES........................ $ -- $ -- $ -- $ -- $ --
EXPENSES:
Research and development...... 386,878 2,980,064 3,745,398 786,495 2,717,402
General and administrative.... 653,557 2,919,351 3,678,460 1,640,497 1,863,712
Stock compensation............ 303,750 5,333,437 5,637,187 4,585,000 3,623,540
----------- ------------- ------------ ----------- -------------
1,344,185 11,232,852 13,061,045 7,011,992 8,204,654
----------- ------------- ------------ ----------- -------------
LOSS FROM OPERATIONS............ (1,344,185) (11,232,852) (13,061,045) (7,011,992) (8,204,654)
----------- ------------- ------------ ----------- -------------
NET LOSS........................ $(1,344,185) $ (11,232,852) $ (13,061,045) $(7,011,992) $ (8,204,654)
----------- ------------- ------------ ----------- -------------
----------- ------------- ------------ ----------- -------------
LOSS PER SHARE.................. $ (.16) $ (1.10) $ (1.47) $ (0.79) $ (0.73)
----------- ------------- ------------ ----------- -------------
----------- ------------- ------------ ----------- -------------
WEIGHTED AVERAGE COMMON AND
COMMON SHARE EQUIVALENTS
OUTSTANDING................... 8,297,103 10,193,131 8,897,833 8,893,702 11,223,072
----------- ------------- ------------ ----------- -------------
----------- ------------- ------------ ----------- -------------
<CAPTION>
PERIOD FROM INCEPTION
(SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30,
1997
----------------------
(UNAUDITED)
<S> <C>
REVENUES........................ $ --
EXPENSES:
Research and development...... 6,462,800
General and administrative.... 5,542,172
Stock compensation............ 9,260,727
------------
21,265,699
------------
LOSS FROM OPERATIONS............ (21,265,699)
------------
NET LOSS........................ $ (21,265,699)
------------
------------
LOSS PER SHARE.................. $ (2.30)
------------
------------
WEIGHTED AVERAGE COMMON AND
COMMON SHARE EQUIVALENTS
OUTSTANDING................... 9,228,395
------------
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
(INFORMATION WITH RESPECT TO THE SIX MONTHS
ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- ADDITIONAL STOCK
NUMBER OF PAID-IN DEFERRED SUBSCRIPTION
SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE
----------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, September 15, 1994 (inception)............ -- $ -- $ -- $ -- $ --
Issuance of common stock at $.001 per share to
officer in November 1994 for cash and
receivable....................................... 4,265,845 4,100 -- -- (4,000)
Issuance of common stock at $.004 per share to
officer in November 1994 for cash and
receivable....................................... 1,248,540 5,000 -- -- (2,500)
Issuance of common stock at $.001 per share in
November 1994 for receivable..................... 104,045 100 -- -- (100)
Issuance of common stock at $.96 per share in
December 1994 for cash and receivable............ 624,270 600,000 -- -- (200,000)
Issuance of common stock at $.96 per share in March
1995 for technology rights....................... 328,563 315,789 -- -- --
Net loss........................................... -- -- -- -- --
----------- ------------ ----------- ------------- ------------
BALANCE, March 31, 1995............................ 6,571,263 924,989 -- -- (206,600)
Fair value of options granted (based upon estimated
fair values of common stock of $1.68 to $2.40 per
share):
July 1, 1995 (67,629 options).................... -- -- 48,750 -- --
November 1, 1995 (88,438 options)................ -- -- 127,500 -- --
January 1, 1996 (88,438 options)................. -- -- 127,500 -- --
March 22, 1996 (712,708 options)................. -- -- 1,027,500 (1,027,500) --
Issuance of common stock in private placements in
December 1995 at $2.40 per share, net of
expenses......................................... 618,034 1,314,616 -- -- (100,000)
Stock issued for services in March 1996............ 624,270 1,500,000 -- (1,500,000) --
Fair value of warrants issued with notes payable... -- -- 31,250 -- --
Payments on stock subscription receivable.......... -- -- -- -- 200,000
Contribution of shares by shareholder in March
1996............................................. (1,336,978) -- -- -- --
Net loss........................................... -- -- -- -- --
----------- ------------ ----------- ------------- ------------
BALANCE, March 31, 1996............................ 6,476,589 3,739,605 1,362,500 (2,527,500) (106,600)
Issuance of common stock in private placements in
April 1996 at $2.40 per share, net of expenses
and repurchased shares........................... 97,995 185,342 -- -- --
Payments on stock subscription receivable.......... -- -- -- -- 106,600
Common stock issued upon cancellation of options in
May 1996......................................... 712,708 1,712,500 (127,500) -- --
Restricted shares issued for services upon
cancellation of options in May 1996.............. 712,708 2,984,466 (1,027,500) (1,956,966) --
Issuance of common stock in initial public offering
in August 1996, net of expenses.................. 3,000,000 12,704,985 -- -- --
Remeasurement of stock issued in March 1996........ -- 1,500,000 -- (1,500,000) --
Amortization of deferred compensation.............. -- -- -- 3,000,000 --
Fair value of options granted to consultants in
October 1996..................................... -- -- 274,433 (174,433) --
Fair value of stock transferred by a major
shareholder to third parties as compensation for
services in December 1996........................ -- -- 648,437 -- --
Net loss........................................... -- -- -- -- --
----------- ------------ ----------- ------------- ------------
BALANCE, March 31, 1997............................ 11,000,000 22,826,898 1,130,370 (3,158,899) --
Remeasurement of restricted shares issued for
services in May 1996............................. -- 579,074 -- (579,074) --
Exercise of stock options.......................... 5,202 5,000 -- -- --
Amortization of deferred compensation.............. -- -- -- 3,623,540 --
Net loss........................................... -- -- -- -- --
----------- ------------ ----------- ------------- ------------
BALANCE, September 30, 1997 (Unaudited)............ 11,005,202 $ 23,410,972 $ 1,130,370 $ (114,433) $ --
----------- ------------ ----------- ------------- ------------
----------- ------------ ----------- ------------- ------------
<CAPTION>
DEFICIT
ACCUMULATED DURING
DEVELOPMENT STAGE TOTAL
------------------- ------------
<S> <C> <C>
BALANCE, September 15, 1994 (inception)............ $ -- $ --
Issuance of common stock at $.001 per share to
officer in November 1994 for cash and
receivable....................................... -- 100
Issuance of common stock at $.004 per share to
officer in November 1994 for cash and
receivable....................................... -- 2,500
Issuance of common stock at $.001 per share in
November 1994 for receivable..................... -- --
Issuance of common stock at $.96 per share in
December 1994 for cash and receivable............ -- 400,000
Issuance of common stock at $.96 per share in March
1995 for technology rights....................... -- 315,789
Net loss........................................... (484,008) (484,008)
------------------- ------------
BALANCE, March 31, 1995............................ (484,008) 234,381
Fair value of options granted (based upon estimated
fair values of common stock of $1.68 to $2.40 per
share):
July 1, 1995 (67,629 options).................... -- 48,750
November 1, 1995 (88,438 options)................ -- 127,500
January 1, 1996 (88,438 options)................. -- 127,500
March 22, 1996 (712,708 options)................. -- --
Issuance of common stock in private placements in
December 1995 at $2.40 per share, net of
expenses......................................... -- 1,214,616
Stock issued for services in March 1996............ -- --
Fair value of warrants issued with notes payable... -- 31,250
Payments on stock subscription receivable.......... -- 200,000
Contribution of shares by shareholder in March
1996............................................. -- --
Net loss........................................... (1,344,185) (1,344,185)
------------------- ------------
BALANCE, March 31, 1996............................ (1,828,193) 639,812
Issuance of common stock in private placements in
April 1996 at $2.40 per share, net of expenses
and repurchased shares........................... -- 185,342
Payments on stock subscription receivable.......... -- 106,600
Common stock issued upon cancellation of options in
May 1996......................................... -- 1,585,000
Restricted shares issued for services upon
cancellation of options in May 1996.............. -- --
Issuance of common stock in initial public offering
in August 1996, net of expenses.................. -- 12,704,985
Remeasurement of stock issued in March 1996........ -- --
Amortization of deferred compensation.............. -- 3,000,000
Fair value of options granted to consultants in
October 1996..................................... -- 100,000
Fair value of stock transferred by a major
shareholder to third parties as compensation for
services in December 1996........................ -- 648,437
Net loss........................................... (11,232,852) (11,232,852)
------------------- ------------
BALANCE, March 31, 1997............................ (13,061,045) 7,737,324
Remeasurement of restricted shares issued for
services in May 1996............................. -- --
Exercise of stock options.......................... -- 5,000
Amortization of deferred compensation.............. -- 3,623,540
Net loss........................................... (8,204,654) (8,204,654)
------------------- ------------
BALANCE, September 30, 1997 (Unaudited)............ $ (21,265,699) $ 3,161,210
------------------- ------------
------------------- ------------
</TABLE>
- ----------------------------------
* No shares of Preferred Stock issued.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(SEPTEMBER 15, SIX MONTHS ENDED (SEPTEMBER 15,
YEAR ENDED MARCH 31, 1994) SEPTEMBER 30, 1994)
----------------------- THROUGH MARCH 31, ---------------------- THROUGH
1996 1997 1997 1996 1997 SEPTEMBER 30, 1997
---------- ----------- ------------------- ---------- ---------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss..................... $(1,344,185) $(11,232,852) $ (13,061,045) $(7,011,992) $(8,204,654) $ (21,265,699)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation............... -- 9,188 9,188 -- 38,914 48,102
Amortization of discount on
notes payable............ -- 31,250 31,250 31,250 -- 31,250
Stock issued for technology
licensing rights......... -- -- 315,789 -- -- 315,789
Stock and options issued
for services............. 303,750 5,333,437 5,637,187 4,585,000 3,623,540 9,260,727
(Increase) decrease in
prepaid research
services................. (5,000) 88,333 -- -- -- --
(Increase) decrease in
other current assets..... -- (308,351) (337,593) 94,203 7,734 (329,859)
(Increase) decrease in
other non-current
assets................... (48,167) (84,598) (138,684) 17,848 (92,287) (230,971)
Increase (decrease) in
amount due to USC........ 166,000 (176,000) -- -- -- --
Increase (decrease) in
accounts payable and
accrued expenses......... 116,542 973,554 1,094,596 445,306 (202,842) 891,754
---------- ----------- ------------------- ---------- ---------- -------------------
Net cash used in
operating activities... (811,060) (5,366,039) (6,449,312) (1,838,385) (4,829,595) (11,278,907)
---------- ----------- ------------------- ---------- ---------- -------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of equipment........ -- (194,759) (194,759) (56,910) (64,289) (259,048)
---------- ----------- ------------------- ---------- ---------- -------------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from issuance of
common stock............... 1,214,616 12,890,327 14,507,543 12,724,101 5,000 14,512,543
(Increase) decrease in
deferred offering costs.... (94,203) 94,203 -- -- -- --
Proceeds from stock
subscription receivable.... 200,000 106,600 306,600 100,000 -- 306,600
Proceeds from notes
payable.................... 250,000 20,000 270,000 270,000 -- 270,000
Repayment of notes payable... -- (270,000) (270,000) (250,000) -- (270,000)
---------- ----------- ------------------- ---------- ---------- -------------------
Net cash provided by
financing activities... 1,570,413 12,841,130 14,814,143 12,844,101 5,000 14,819,143
---------- ----------- ------------------- ---------- ---------- -------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS......... 759,353 7,280,332 8,170,072 10,948,806 (4,888,884) 3,281,188
CASH AND CASH EQUIVALENTS,
beginning of period.......... 130,387 889,740 -- 889,740 8,170,072 --
---------- ----------- ------------------- ---------- ---------- -------------------
CASH AND CASH EQUIVALENTS, end
of period.................... $ 889,740 $ 8,170,072 $ 8,170,072 $11,838,546 $3,281,188 $ 3,281,188
---------- ----------- ------------------- ---------- ---------- -------------------
---------- ----------- ------------------- ---------- ---------- -------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
1. ORGANIZATION, NARRATIVE DISCUSSION OF THE BUSINESS AND RISK FACTORS
ORGANIZATION
PharmaPrint Inc. (the "Company" or "PharmaPrint"), a development stage
company, was incorporated in the State of California in September 1994. In April
1997, the Board of Directors approved a resolution to change the Company's state
of incorporation from California to Delaware, such resolution was approved at
the August 19, 1997 Annual Meeting of Shareholders. The Company was formed in
order to complete the development and commercialization of the research
initiated by Dr. Tasneem A. Khwaja, a founder and major shareholder of the
Company, over a 20 year period at the University of Southern California ("USC")
School of Medicine.
NARRATIVE DESCRIPTION OF THE BUSINESS
PharmaPrint uses its PharmaPrint Process technology to develop
pharmaceutical-grade dietary supplement products and pharmaceuticals from
botanical sources. Unlike the traditional drug development process of
identifying and synthesizing single bioactive molecules from plant sources, the
Company's core technologies were developed based on empirical data that suggest
that the health benefits and safe usage of certain plant-derived therapeutics
might be the result of the natural combination of multiple molecules found in
the plant extract and that single molecules, in isolation, may not replicate the
natural plants' effectiveness. The PharmaPrint Process technology enables the
Company to identify and quantify the bioactives within plant sources that are
believed to provide therapeutic benefits and produce dietary supplements and
pharmaceuticals having consistent batch-to-batch quantities and ratios of these
bioactives.
The Company is applying a dual commercialization strategy with its
PharmaPrint Process technology. The first application of the PharmaPrint Process
is for the development of high quality, herbal dietary supplements. The second
application of the PharmaPrint process is the development of FDA-approvable
pharmaceuticals from natural plant sources. The Company's initial pharmaceutical
product candidate, PPRT-321, a saw palmetto-derived drug that is being developed
for the treatment of symptoms associated with benign prostatic hyperplasia
("BPH") is currently in Phase II clinical trials. In addition, the Company has
begun development of five additional plant-derived medicines that have long
histories of safe use and indications of efficacy.
DEVELOPMENT STAGE COMPANY AND RISK FACTORS
PharmaPrint is considered to be a development stage company. Since inception
(September 15, 1994), the Company has engaged only in research and development
activities and intends to continue research, development and testing of its
proprietary technologies and dietary supplement and pharmaceutical products. The
Company has not received any royalties or revenues from product sales.
The Company, as a development stage enterprise, has yet to generate revenues
and has no assurance of future revenues. There can be no assurance that the
Company will obtain FDA approval or be able to successfully market its
PharmaPrint Process. The Company is likely to incur substantial and increasing
F-7
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
1. ORGANIZATION, NARRATIVE DISCUSSION OF THE BUSINESS AND RISK FACTORS
(CONTINUED)
operating losses as it continutes its research and development efforts and until
such time, if ever, as product sales, royalties, and license and development and
other fees can generate sufficient revenue to fund its continuing operations.
The Company's future capital requirements will depend on many factors, including
but not limited to the Company's ability to successfully market its PharmaPrint
Process to third parties, overall product development costs including the cost
of toxicology testing and clinical trials, the length of time required to obtain
FDA approval, if any, competing technological and market developments, changes
in existing collaborative relationships, sales and marketing arrangements and
the costs of establishing subcontracts for research and development.
Additionally, no assurance can be given that additional capital, if needed, will
be available when required or upon terms acceptable to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For financial reporting purposes, the Company considers all highly liquid
instruments purchased with an original maturity of three months or less to be
cash equivalents.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
EQUIPMENT
Equipment is stated at cost and consisted of the following at March 31,
1997:
<TABLE>
<S> <C>
Equipment......................................................... $ 119,252
Furniture......................................................... 75,507
Less accumulated depreciation..................................... (9,188)
---------
Equipment, net.................................................... $ 185,571
---------
---------
</TABLE>
Depreciation is provided using the straight-line method over the estimated
useful life for equipment of three years and furniture for five years.
OTHER LONG-TERM ASSETS
Organization costs are amortized on a straight-line basis over five years.
Patent costs are amortized on a straight-line basis over 10 years.
F-8
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE
Loss per share is computed based on the weighted average number of shares
outstanding for the period. Common equivalent shares are excluded from the
computation as their effect is antidulutive, except that, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and common
equivalent shares (stock options, warrants and preferred stock) issued during
the period commencing 12 months prior to the initial filing of the Company's
initial public offering (the "Offering") at prices below the public offering
price have been included in the calculation as if they were outstanding for all
periods presented (using the treasury stock method).
INCOME TAXES
The Company accounts for income taxes using the liability method as
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax basis of assets and liabilities using enacted tax rules that will be in
effect when the differences are expected to reverse.
NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS
During fiscal 1997, the Company adopted SFAS No. 123 "Accounting for
Stock-Based Compensation." As permitted under SFAS No. 123, the Company will
continue to account for employee stock options in accordance with APB Opinion
No. 25 and has made the necessary pro forma disclosures mandated by SFAS No.
123. Additionally, all non-employee stock options will be accounted for in
accordance with SFAS No. 123. Compensation expense related to such non-employee
stock options will be calculated using the fair market value of the stock option
on the date of grant. (See Note 6.)
The Company also adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in fiscal 1997.
The adoption of this pronouncement did not have a material impact on the
financial position and results of operations of the Company.
PENDING ACCOUNTING PRONOUNCEMENTS
In fiscal 1998, the Company will be required to adopt SFAS No. 128 "Earnings
Per Share" and SFAS No. 129 "Disclosure of Information About Capital Structure."
SFAS No. 128 establishes standards for computing and presenting earnings (loss)
per share by simplifying the standards previously found in APB Opinion No. 15,
and makes them comparable to international standards. SFAS No. 129 establishes
standards for disclosing information about an entity's capital structure. The
adoption of either of these Statements will not have a significant impact on its
financial position or reported results of operations.
F-9
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications were made to prior period amounts, enabling them
to conform to current period presentation.
INTERIM RESULTS (UNAUDITED)
The accompanying balance sheet as of September 30, 1997 and the statements
of operations, cash flows and shareholders' equity for the six months ended
September 30, 1996 and 1997 and for the period from inception (September 15,
1994), through September 30, 1997 are unaudited. In the opinion of management,
these statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the results of the interim
periods. The results of operations are not necessarily indicative of the results
that may be expected for an entire year.
3. AGREEMENTS WITH USC
LICENSE AGREEMENT
In March 1995, the Company entered into a license agreement with USC (the
"USC License Agreement") that grants the Company an exclusive, worldwide license
to: (1) the PharmaPrint Process; (2) use certain therapeutic compounds; and (3)
other related products developed by Dr. Khwaja's laboratory at USC. USC has also
agreed to grant the Company the right to sublicense certain products and a right
of first refusal to obtain a license for any improvements to certain products
developed by USC. The term of the USC License Agreement began March 1, 1995, and
ends on the later of February 28, 2010, or the expiration of the last issued
patent under the USC License Agreement.
In exchange for the license, the Company agreed to pay USC: (1) royalty
payments of 3% of the Company's net sales of pharmaceutical products developed
using the PharmaPrint Process; (2) after the first patent issues, an annual
minimum royalty of $15,000, which shall increase by $5,000 annually for the
following two years and be $25,000 annually thereafter; (3) an annual license
fee of $10,000 payable until a patent issues; and (4) 328,563 shares of the
Company's common stock at the time of the exchange. During fiscal 1996, USC and
Dr. Khwaja were party to a Distribution of Royalty Income Agreement pursuant to
which USC agreed to pay Dr. Khwaja 50% of the net royalties received by USC
under the USC License Agreement. During fiscal 1997, Dr. Khwaja waived his right
to such consideration. The cost of the USC License Agreement, approximately
$316,000, recorded as research and development expense in the fiscal 1995
statement of operations, is also included in the accompanying statement of
operations for the period from inception (September 15, 1994) through March 31,
1997.
In September 1997, the USC License Agreement was amended to change the
royalty percentage to 1% from the original 3% described above.
F-10
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
3. AGREEMENTS WITH USC (CONTINUED)
RESEARCH AGREEMENT
Effective March 1, 1995, the Company and USC entered into a five year
research agreement (the "Research Agreement") that required USC to perform
certain research, as defined under the Research Agreement, from March 1, 1995
through February 29, 2000. Due to the completion of the work performed on the
Company's initial pharmaceutical and the underlying science relating to the
PharmaPrint Process, effective March 31, 1997, the Company and USC mutually
agreed to cancel the Research Agreement. Total expenses incurred relating to the
Research Agreement for the year ended March 31, 1996, were $201,000. During the
year ended March 31, 1997, the Company reimbursed USC $116,000 of the $176,000
amount outstanding as of March 31, 1996. The remaining $60,000 was recorded as a
reduction of research and development expense during fiscal 1997.
4. INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through March 31, 1997. At March 31,
1997, the Company has net operating loss carryforwards available to offset
future taxable income for federal and state income tax purposes of approximately
$5,100,000 and $ 2,550,000, respectively; such carryforwards expire in various
years through 2012. Other deferred tax assets include the timing of certain
expenses for book and tax purposes. The Company has provided a valuation
allowance to offset all deferred tax assets due to the uncertainty of
realization.
Under the Tax Reform Act of 1986, the amounts of and benefits from net
operating losses carried forward may be impaired or limited in certain
circumstances. Events that may cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not limited
to, a cumulative ownership change of more than 50% over a three year period. At
March 31, 1997, the effect of such limitation, if imposed, has not been
determined.
5. COMMITMENTS AND CONTINGENCIES
LEASE
The Company leases its corporate headquarters under an operating lease that
expires in December 1998. Rent expense for the current and the previous
(expired) office lease was approximately $10,000 and $86,000 for the years ended
March 31, 1996 and 1997, respectively. At March 31, 1997, future minimum lease
payments under the noncancelable operating lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 AMOUNT
- ------------------------------------------ ----------
<S> <C>
1998...................................... $ 160,000
1999...................................... 129,000
----------
$ 289,000
----------
----------
</TABLE>
F-11
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS
At March 31, 1997, the Company had employment agreements (the "Employment
Agreements") with its Chief Executive Officer and its Chief Scientific Officer.
The Employment Agreements provide for base salaries in the aggregate of
$334,000, plus certain benefits. The Employment Agreements were effective
November 1, 1995, and were subsequently modified in May 1996 and March 1997. The
Employment Agreements expire in October 1998.
PERSONAL SERVICES AGREEMENT
The Company entered into an agreement (the "Personal Services Agreement")
with Dimension Memory, Inc. ("Dimension Memory") in May 1996. Pursuant to the
Personal Services Agreement, which expires on December 31, 1998, Dimension
Memory is to provide the services of Robert J. Burgess as Executive Vice
President and Chief Operating Officer of the Company. Under the terms of the
Personal Services Agreement, the Company is to provide annual compensation to
Dimension Memory of $140,000, to be paid at a rate of $11,667 monthly, and
certain other benefits. The Company also issued 712,708 shares of its common
stock to Dimension Memory. As a result of the issuance of common stock, the
Company recorded compensation expense of $1,585,000 for the year ended March 31,
1997.
In December 1996, the Company amended the Personal Services Agreement with
Dimension Memory. The amended agreement provides for the immediate payment by
the Company of all amounts due under the Personal Services Agreement in exchange
for Dimension Memory agreeing to provide additional services to the Company. As
a result of this amended agreement, in December 1996 the Company paid and
capitalized an amount to Dimension Memory of $312,000 and will amortize such
amounts through December 1998. The unamortized amount, $266,000 at March 31,
1997, has been recorded in other current assets in the accompanying balance
sheet.
Effective April 15, 1997, Dimension Memory agreed to provide the services of
Mr. Burgess as the Company's President and Chief Operating Officer and the
Company agreed to pay Dimension Memory at a rate of $36,000 per year, effective
March 1, 1997.
6. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company's Board of Directors is authorized, subject to applicable law,
to provide for the issuance of Preferred Stock in one or more series, to
establish from time to time the number of shares to be included in each such
series, to fix or alter the rights, preferences, privileges and restrictions,
including voting, conversion, liquidation, dividend and redemption of the shares
of each wholly unissued series and any restrictions thereon, and to increase or
decrease the number of shares of any such series (but not below the number of
shares of such series then outstanding) without further action of the
shareholders. As of March 31, 1997, the Company has not issued any of the
1,000,000 shares of authorized preferred stock.
F-12
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
Subject to the rights of any Preferred Stock that may be outstanding,
holders of common stock are entitled to receive dividends as determined by the
Company's Board of Directors. Each shareholder is entitled to one vote for each
share of common stock held. The common stock is not entitled to either
preemptive rights or redemption. In the event of liquidation, the holders of
common stock will be entitled to receive a pro rata basis all of the remaining
net assets of the Company available for distribution.
In July 1996, the Company's Board of Directors approved a 1.04045 for 1
stock split of the Company's common stock. All references in the accompanying
financial statements to the number of shares and per share amounts, unless
otherwise noted, have been restated to reflect the effect of this action.
In August 1996, the Company completed the Offering of 3,000,000 shares of
its common stock at $5.00 per share. The Company received net proceeds from this
sale of approximately $12,705,000.
During the fiscal year ended March 31, 1997, Dr. Khwaja, the Company's then
Chairman and a majority shareholder, agreed to transfer 125,000 shares of his
common stock to third parties for services rendered on behalf of the Company. As
a result of this transfer, compensation expense of approximately $648,000 was
recorded and included in stock compensation expense during fiscal 1997 and
additional paid-in capital at March 31, 1997.
In May 1997, the Company's Board of Directors approved an increase in the
number of authorized shares of common stock from 19,000,000 to 24,000,000, such
increase was approved by the Company's shareholders in August 1997.
PRIVATE PLACEMENT
In December 1995, the Company sold 618,034 shares of its common stock at
$2.40 per share in a private placement. The Company received proceeds from this
sale of approximately $1,315,000.
During 1996, the Company offered (the "Repurchase Offer") to certain private
placement shareholders of the Company's common stock two alternatives, either
(i) the right to receive an additional one share of common stock for each share
purchased in certain private placements, thus effectively reducing the price by
half, or (ii) the right to cause the Company to repurchase the shares of common
stock for $5.00 per share (the original purchase price), plus interest from the
date of purchase. By its terms, the Repurchase Offer remained open for 30 days
and terminated on July 3, 1996. The Repurchase Offer resulted in the Company
repurchasing 35,600 shares (pre-split) for $91,000 in cash and the cancellation
of $87,000 of stock subscriptions receivable.
In April 1996, the Company sold 97,995 shares of its common stock at $2.40
per share in a private placement. The Company received net proceeds from this
sale of approximately $185,000, net of fees and repurchased shares.
F-13
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
1995 STOCK OPTION PLAN
On April 14, 1995, the Company adopted the 1995 Stock Option Plan, as
Amended (the "1995 Plan"), pursuant to which directors, officers, key employees,
consultants, scientific advisors and other personnel working directly with the
Company are eligible to receive stock options as defined in the 1995 Plan. The
1995 Plan is administered by a designated committee (the "Committee") of the
Board of Directors, which is empowered to determine the terms and conditions of
each option, as defined by the 1995 Plan. The Company can grant either
nonqualified or incentive stock options, as defined, under the 1995 Plan that
vest as determined by the Committee. The 1995 Plan, unless terminated sooner by
the Board of Directors, will terminate on April 14, 2005.
Option activity from adoption of the 1995 Plan (April 15, 1995) to March 31,
1997 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, 1996 MARCH 31, 1997
-------------------------- ---------------------------
WEIGHTED WEIGHTED
OPTIONS AVERAGE PRICE OPTIONS AVERAGE PRICE
--------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period....... -- -- 997,097 $ 0.96
Granted.............................. 997,097 $ 0.96 409,251 $ 5.08
Exercised............................ -- -- -- --
Cancelled............................ -- -- (624,270) $ 0.96
--------- ----------
Outstanding at end of period............. 997,097 $ 0.96 782,078 $ 3.11
--------- ----------
--------- ----------
Exercisable at end of period............. 997,097 $ 0.96 577,566 $ 2.37
--------- ----------
--------- ----------
</TABLE>
The 782,078 options to purchase common stock outstanding at March 31, 1997,
have exercise prices between $0.96 and $5.88 and a weighted average remaining
option period of approximately 5.3 years.
During the year ended March 31, 1996, the Company granted certain options to
purchase common stock at an exercise price below the estimated fair value of the
Company's common stock on the date of grant. As a result, the Company recorded
approximately $304,000 as stock compensation expense during fiscal 1996.
F-14
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
During the year ended March 31, 1996, the Company granted two individuals
options to purchase 801,147 shares of common stock at a price of $0.96 per share
outside of the 1995 Plan. During the year ended March 31, 1997, these options
were canceled.
During the year ended March 31, 1997, the Company granted to consultants,
options to purchase 86,800 shares of common stock, at the fair market value on
the date of grant. Of such grants, 10,000 options were granted under the 1995
Plan and vested immediately and 76,800 options were granted outside the 1995
Plan (see below) and vest over two years. In accordance with SFAS No. 123, the
Company recorded compensation expense of approximately $100,000 during fiscal
1997. Additionally, the Company has recorded $174,000 as deferred compensation
relating to the 76,800 options at March 31, 1997, such amount to be amortized
over the remaining vesting period (18 months) of the options and has included
$274,000 in additional paid-in-capital at March 31, 1997.
During the year ended March 31, 1997, the Company also granted options to
purchase 141,800 shares of common stock, at the fair market value on the date of
grant, outside of the 1995 Plan. Additionally, the Company's then Chairman of
the Board of Directors and a majority shareholder, granted certain individuals
options to purchase 430,000 shares of his common stock at fair value on the date
of grant.
On August 19, 1997, the shareholders voted to increase the number of shares
of common stock available for grant under the 1995 Plan from 800,000 to
2,200,000 shares. During the six month period ended September 30, 1997 the
Company granted 1,031,500 additional options to purchase common stock to
employees at a weighted average exercise price of $6.19 per share. Additionally,
during the six months ended September 30, 1997 options to purchase 141,800
shares of common stock, at an average exercise price of $4.60, that were
originally granted outside the 1995 Plan were incorporated into the 1995 Plan.
At September 30, 1997, the Company has granted options to purchase common stock
for an aggregate of 1,955,378 shares under the 1995 Plan.
During fiscal 1997, the Company adopted the provisions of SFAS No. 123. As
permitted under SFAS No. 123, the Company will continue to account for employee
stock options in accordance with APB Opinion No. 25. Accordingly, no
compensation expenses has been recognized in the accompanying statements of
operations, other than compensation expense recognized for options granted to
employees below fair value of the Company's common stock on the date of grant
and options granted to consultants
F-15
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
of the Company. Had compensation expense related to employee stock options been
determined under the provisions of SFAS No. 123, the Company's net loss and loss
per share would have been as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR YEARS ENDED INCEPTION
------------------------------ (SEPTEMBER 15, 1994),
MARCH 31, 1996 MARCH 31, 1997 THROUGH MARCH 31, 1997
-------------- -------------- ---------------------------
<S> <C> <C> <C>
NET LOSS
As reported.................. $ (1,344,185) $(11,232,852) $ (13,061,045)
Pro forma.................... $ (1,407,998) $(12,183,608) $ (14,075,614)
LOSS PER SHARE
As reported.................. $ (.16) $ (1.10) $ (1.47)
Pro forma.................... $ (.17) $ (1.20) $ (1.58)
</TABLE>
The weighted average fair value of options granted was $1.37 and $2.65 for
the years ended March 31, 1996 and 1997, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions used for grants in fiscal years
1996 and 1997, respectively: weighted average risk free interest rates of 5.99%
and 5.67%; expected dividend yields of 0% for each year; expected lives of 3
years and 4 years; and expected volatility of approximately 0% and 65%.
SHAREHOLDERS AGREEMENT
The Company entered into a shareholders agreement (the "Shareholders
Agreement") in March 1996, with Elliot P. Friedman, the Company's Chief
Executive Officer, Tasneem Khwaja, the Company's then Chairman, and certain
individuals and entities. Pursuant to the Shareholders Agreement: (1) Dr. Khwaja
contributed 1,336,978 shares of common stock to the Company as a capital
contribution; (2) the Company issued 624,270 shares of common stock to D-RAM
Industries Pty. Ltd. ("D-RAM"), as nominee of Robert J. Burgess for consulting
services; and (3) the Company granted stock options to purchase 712,708 shares
of common stock at a price of $0.96 per share to Mr. Friedman.
The common stock options granted to Mr. Friedman and the common stock issued
to D-RAM were subject to cancellation if the Company did not raise a minimum
amount of proceeds in the Offering prior to August 16, 1997, as defined. In
addition, the options granted to Mr. Friedman were to vest on the earlier of the
date: (1) the Company received approval of the FDA for the public sale of any
pharmaceutical product; (2) the Company consummated a merger or other
transaction or the Company sold substantially all of its assets; (3) the Company
generated net pretax earnings of $0.50 per share for two consecutive years, as
defined; or (4) certain shares of common stock of each of Mr. Friedman and Dr.
Khwaja, the sale of which is restricted until August 14, 2001 pursuant to a
lock-up agreement with the underwriter of the Offering, are released from such
lock-up agreement.
In May 1996, the Shareholders' Agreement was revised and the stock options
to purchase 712,708 shares of common stock granted to Mr. Friedman were canceled
and the Company issued 712,708 shares
F-16
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
of common stock to Mr. Friedman. Such shares are subject to the same conditions
as the aforementioned options to purchase common stock.
In August 1996, due to the successful completion of the Offering, the
conditions placed upon the common stock issued to D-RAM were met and thus the
Company recorded $3,000,000 of compensation expense in the accompanying
statement of operations for the year ended March 31, 1997, based upon the
estimated fair market value of the stock at the time the conditions were met.
In September 1997, the underwriter of the Company's initial public offering
agreed to release Mr. Friedman from the lock-up agreement discussed above and
thereby accelerated the vesting. Accordingly, the Company recorded approximately
$3,564,000 of stock compensation expense during the six months ended September
30, 1997.
WARRANTS
At March 31, 1997, a shareholder had a warrant outstanding for the purchase
of 52,203 shares of common stock at a purchase price of $0.96. The warrant is
exercisable through March 31, 2001.
At March 31, 1997, the underwriter of the Offering had a warrant outstanding
for the purchase of 300,000 shares of common stock at a purchase price of $8.25
per share. The warrant is exercisable through August 2001. In May 1997, the
underwriter agreed that any shares of common stock purchased pursuant to the
warrant would not be sold for an additional year (until August 20, 1998) and the
Company agreed to reduce the purchase price of the warrant to $5.50 per share.
7. RELATED-PARTY TRANSACTIONS
Advanced Bioresearch Associates ("ABA") is a clinical research organization
that provides FDA strategic consulting and professional services and provides
guidance to the Company in connection with various clinical, scientific and
regulatory matters. ABA has offices in San Diego and San Francisco, California
and Washington, D.C. Mr. Howard R. Asher, a member of the Company's Board of
Directors, is the President and Chief Executive Officer and a controlling
shareholder of ABA. The Company incurred approximately $98,000, and $1,069,000
of research and development expenses relating to the services provided by ABA
for the years ended March 31, 1996 and 1997, respectively. At March 31, 1997,
the Company included in accounts payable approximately $172,000 relating to
amounts owed to ABA.
During the year ended March 31, 1997, the Company utilized the services of
Mr. Phillip G. Trad, a member of the Company's Board of Directors, for various
legal and business development matters. The Company incurred approximately
$50,000 of general and administrative expenses for the year ended March 31,
1997, relating to the services provided by Mr. Trad. At March 31, 1997, the
Company included in accounts payable $10,000 relating to amounts owed to Mr.
Trad.
F-17
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
8. SUBSEQUENT EVENTS (UNAUDITED)
In October 1997, the Company entered into several agreements with American
Home Products Corporation ("AHP") whereby AHP will market the Company's dietary
supplements under AHP's Centrum brand name. Pursuant to the terms of the
agreement, AHP paid the Company $2.5 million in an up-front licensing fee and is
required to pay an additional fee of $500,000 upon the achievement of each of
(i) the issuance of a patent containing claims covering the PharmaPrint Process
and (ii) receipt and approval by AHP of the initial AHP Products in sufficient
time to permit AHP to meet its proposed launch date. The Company will record the
$2.5 million licensing fee as revenue in the periods such fee was earned and at
such time as it is no longer forfeitable. This will occur at the time of the
first commercial sale by AHP of AHP Products. Additionally, AHP has agreed to
spend at least the lesser of $20 million or an amount equal to 50% of net sales
of the AHP Products in advertising and other marketing expenditures during each
of the two years following product launch. AHP has also agreed to purchase the
dietary supplements under a Supply Agreement at specified prices. In addition,
if the Company succeeds in securing a patent containing a claim or claims
comprising the PharmaPrint Process applied generally or on a product-by-product
basis covering the production of one or more of the AHP Products, AHP will pay
royalties to the Company on sales of those products of 4% in the first year and
6% thereafter.
In November 1997, the Company entered into a commitment to purchase
$20,000,000 of raw materials over the next three years in order to supply
certain dietary supplements under the AHP Supply Agreement.
F-18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE AS OF
WHICH INFORMATION IS FURNISHED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 20
Price Range of Common Stock............................................... 20
Dividend Policy........................................................... 20
Dilution.................................................................. 21
Capitalization............................................................ 22
Selected Financial Data................................................... 23
Management Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 24
Business.................................................................. 28
Management................................................................ 41
Executive Compensation.................................................... 45
Principal Stockholders.................................................... 48
Certain Transactions...................................................... 49
Description of Capital Stock.............................................. 50
Underwriting.............................................................. 53
Legal Matters............................................................. 55
Experts................................................................... 55
Index to Financial Statements............................................. F-1
</TABLE>
1,500,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
[LOGO]
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
LIMITATION OF DIRECTOR'S LIABILITY.
The Company's Certificate of Incorporation eliminates the liability of
directors to the fullest extent permissible under Delaware law. Delaware law
permits a corporation to limit the personal liability of a director to the
corporation or its shareholders for monetary damages for breach of certain
fiduciary duties as a director, provided, that the director's liability may not
be eliminated or limited for; (a) breaches of the director's duty of loyalty to
the corporation or its shareholders; (b) acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law; (c) the payment
of unlawful dividends or unlawful stock repurchases or redemptions; or (d)
transactions in which the director received an improper personal benefit. A
director's liability may also not be limited for violation of, or otherwise
relieve the corporation or its directors from the necessity of complying with,
federal or state securities laws or affect the availability of non-monetary
remedies such as injunctive relief or rescission.
INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's Bylaws relating to indemnification require that the Company
indemnify its directors and its executive officers to the fullest extent
permitted under Delaware law, provided, that the Company may modify the extent
of such indemnification by individual contracts with its directors and executive
officers, and provided, further, that the Company will not be required to
indemnify any director or executive officer in connection with a proceeding
initiated by such person, with certain exceptions. Delaware corporate law, the
Company's Bylaws, as well as any indemnity agreements, may also permit
indemnification for liabilities arising under the Securities Act or the
Securities Exchange Act of 1934, as amended. Without limiting any right an
indemnitee may have under Delaware corporate law and the Company's Bylaws, the
Board of Directors have adopted an Indemnification and Hold Harmless Agreement
("Indemnity Agreement") to provide additional indemnification and reimbursement
to all qualified directors and officers of the Company, and to hold such
directors and officers harmless from certain liabilities, judgments and related
expenses. Any individual who is a duly elected or appointed member of the Board
of Directors, a corporate officer of the Company or any employee or agent as
approved the Board of Directors is deemed a person who qualifies as an
indemnitee under the Indemnity Agreement.
The Board of Directors has been advised that, in the opinion of the
Securities and Exchange Commission, indemnification of liabilities arising under
the Securities Act is contrary to public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director or officer of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director or officer in connection with the Shares being registered hereby, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the Offering other than underwriting discounts and commissions.
All amounts are estimates except the filing fees payable to the SEC and the
NASD.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee.............................................................. $ 12,500
NASD Filing Fee................................................................... $ 5,000
Printing, Engraving and Mailing Expenses.......................................... $ 100,000
Legal Fees and Expenses........................................................... $ 225,000
Accounting Fees and Expenses...................................................... $ 50,000
Blue Sky Fees and Expenses........................................................ $ 10,000
Transfer Agent Fees............................................................... $ 10,000
Miscellaneous Expenses............................................................ $ 62,500
----------
Total......................................................................... $ 475,000
----------
----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth all sales of unregistered securities by the
Registrant within the past three years.
<TABLE>
<CAPTION>
DATE ISSUED SECURITY HOLDER SECURITIES SHARES CONSIDERATION
- ------------------------ ----------------------------------- ---------------- --------- ---------------------
<S> <C> <C> <C> <C>
November 10, 1994 Tasneem A. Khwaja, Ph.D. Common Stock 4,265,845 $4,100
November 10, 1994 Elliot P. Friedman Common Stock 1,248,540 $5,000
November 10, 1994 John Kirch Common Stock 104,045 $100
December 6, 1994 Dimension Memory, Inc. Common Stock 624,270 $600,000
March 16, 1995 USC Common Stock 328,563 grant of exclusive
license for patents
March 22, 1996 D-RAM Industries Pty Ltd., as the Common Stock 624,270 for services rendered
nominee of Robert Burgess
March 31, 1996 Luther Family Trust Warrant 50,000 consideration for
Bridge loan
December 1995 through 95 Private Placement Purchasers Common Stock 715,980 $1,898,360
April 30, 1996 pursuant to a subscription
agreement and repurchase offer
May 8, 1996 Elliot Friedman Common Stock 712,708 for services rendered
May 8, 1996 Dimension Memory, Inc. Common Stock 712,708 for services rendered
August 1, 1997 Yu Hu Common Stock 5,202 $5,202
November 5, 1997 Luther Family Trust Common Stock 48,482 delivery of Common
Stock upon cashless
exercise of Warrant
</TABLE>
With regard to the foregoing transactions, the Company relied upon Section
4(2) of the Act as an exemption from the registration requirements of the
Securities Act and upon Section 25102(f) of the California Corporate Securities
Law of 1968, as an exemption from the qualification requirements of that
statute. All of the security holders listed above were accredited investors,
except John Kirch who was a sophisticated investor. The Company made this
determination based upon representations made by such holders and their contacts
with and involvement in the business of the Company. Mr. Kirch had access to
information on the Company necessary to make an informed investment decision.
The services rendered for the issuance of securities on March 22, 1996 to D-RAM
Industries Pty. Ltd. and on May 8, 1996 to Dimension Memory, Inc. consisted of
Robert Burgess' activities as Chief Operating Officer of the Company. The
services rendered for the issuance of securities to Elliot Friedman on May 8,
1996 consisted of Mr. Friedman's activities as President of the Company.
II-2
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C>
1.1(1) Form of Underwriting Agreement
2.1(2) Certificate of Ownership and Merger
3.1(2) Amended and Restated Articles of Incorporation of the Company
3.2(2) Bylaws of the Company as amended to date
4.1(3) Form of Common Stock certificate
4.2(1) Form of Representative's Warrant
5.1(1) Opinion of Klehr, Harrison, Harvey, Branzburg & Ellers LLP
10.1(4) 1995 Stock Option Plan, as amended, and Form of Incentive Stock Option Agreement
10.2(4) Form of Non-Qualified Stock Option Agreement
10.3(5) Elliot P. Friedman Employment Agreement
10.4(5) Tasneem A. Khwaja Employment Agreement
10.5(5) Robert Burgess Employment Agreement
10.6(3) Dimension Memory, Inc. Personal Services Agreement
10.7(6) Amendment No. 1 to Dimension Memory, Inc. Personal Services Agreement
10.8(2) Form of Confidentiality Agreement
10.9(6) Lease dated October 28, 1997 for Company's headquarter facility
10.10(3) License Agreement dated March 1, 1995 between the Company and USC, as amended, and related Registration
Rights Agreement and Stock Waiver
10.11(3) Letter of Engagement between Company and Advanced Bioresearch Associates
10.12(3) Bridge Note and related Warrant
10.13(3) Shareholders Agreement
10.14(3) Agreement Among Certain Shareholders
10.15(3) Agreement Among Elliot Friedman, Tasneem Khwaja, and the Company
10.16(3) Registration Rights Agreement with D-RAM Industries PTY, Ltd.
10.17(3) Registration Rights Agreement with JadiJo, Inc.
10.18(4) Warrant Agreement between the Company and M.H. Meyerson & Co., Inc.
10.19(2) American Home Products License Agreement (U.S.)
10.20(2) American Home Products License Agreement (Foreign)
10.21(2) American Home Products Supply Agreement
10.22(5) Herbal Products Supply Agreement with Hauser, Inc.
10.23(5) Master Service Agreement with Hauser, Inc.
10.24(5) Saw Palmetto Supply Agreement with Hauser, Inc.
10.25(2) Second Amendment to USC License Agreement
23.1(5) Consent of Klehr, Harrison, Harvey, Branzburg & Ellers LLP (included in Exhibit 5.1)
23.2(5) Consent of Arthur Andersen LLP
24.1(5) Power of Attorney (included on signature page)
</TABLE>
- --------------------------
(1) Filed herewith.
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the six months ended September 30, 1997.
(3) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (No. 333-4912-LA).
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended March 31, 1997.
(5) Previously filed.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the nine months ended December 31, 1996.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the small
business issuer of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the small business issuer
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a registration
statement in reliance upon Rule 430A and contained in the form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of the Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) With respect to the warrants and the shares of Common Stock issuable
upon exercise of the warrants issued (or to be issued) to the Underwriter, that
(1) any prospectus revised to show the terms of offering of such warrants and
shares (other than a transaction on a national securities exchange), and (2) any
prospectus revised to comply with the requirements of Section 10(a) (3) of the
Securities Act, will be filed as a post-effective amendment to the registration
statement prior to any offering thereof; and that the effective date of each
such amendment shall be deemed the effective date of the registration statement
with respect to securities sold after such amendment shall have become
effective.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, this
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Irvine,
State of California, on February 4, 1998.
<TABLE>
<S> <C> <C>
PHARMAPRINT INC.
By: /s/ ELLIOT P. FRIEDMAN
-----------------------------------------
Elliot P. Friedman,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on this 4th day of February, 1998.
SIGNATURES TITLE
- ------------------------------ --------------------------
Chairman of the Board of
/s/ ELLIOT P. FRIEDMAN Directors and Chief
- ------------------------------ Executive Officer February 4, 1998
Elliot P. Friedman (Principal Executive
Officer)
Senior Vice President and
/s/ JAMES R. WODACH Chief Financial Officer
- ------------------------------ (Principal Accounting February 4, 1998
James R. Wodach Officer)
*
- ------------------------------ Director February 4, 1998
John H. Abeles
*
- ------------------------------ Director February 4, 1998
Lyle Anderson
*
- ------------------------------ Director February 4, 1998
Howard R. Asher
*
- ------------------------------ Director February 4, 1998
Tasneem A. Khwaja
*
- ------------------------------ Director February 4, 1998
Phillip G. Trad
*
- ------------------------------ Director February 4, 1998
Nathan F. Troum, M.D.
* Attorney-in-fact pursuant to power of attorney filed as part of the original
filing of this Registration Statement.
/s/ JAMES R. WODACH
- ------------------------------
James R. Wodach
II-5
<PAGE>
1,500,000 Shares
PHARMAPRINT INC.
Common Stock
UNDERWRITING AGREEMENT
February ___, 1998
CIBC Oppenheimer Corp.
As Representative of the Several Underwriters
CIBC Oppenheimer Tower
One World Financial Center
New York, New York 10281
On behalf of the Several
Underwriters named on
Schedule I attached hereto
Ladies and Gentlemen:
PharmaPrint Inc., a Delaware corporation (the "COMPANY"), proposes to sell
to you and the other underwriters named on Schedule I to this Agreement (the
"UNDERWRITERS"), for whom you are acting as representative (the
"REPRESENTATIVE"), an aggregate of 1,500,000 shares (the "FIRM SHARES") of the
Company's Common Stock, $0.001 par value (the "COMMON STOCK"). In addition, the
Company proposes to grant to the Underwriters an option to purchase up to an
additional 225,000 shares (the "OPTION SHARES") of Common Stock from it for the
purpose of covering over-allotments in connection with the sale of the Firm
Shares. The Firm Shares and the Option Shares are together called the "SHARES."
The Company also proposes to issue to the Representative and Cruttenden
Roth Incorporated, in their respective individual capacities, the warrants
referred to in Section 1(c) to purchase up to an aggregate of 75,000 shares of
Common Stock.
1. SALE AND PURCHASE OF THE SHARES.
On the basis of the representations, warranties and agreements contained
in, and subject to the terms and conditions of, this Agreement:
(a) The Company agrees to sell to each of the Underwriters, and each
of the Underwriters agrees, severally and not jointly, to purchase from the
Company, at $_____ per share (the "INITIAL PRICE"), the number of Firm
Shares set forth opposite the name of such Underwriter on Schedule I to
this Agreement.
<PAGE>
(b) The Company grants to the several Underwriters an option to
purchase, severally and not jointly, all or any part of the Option Shares
at the Initial Price. The number of Option Shares to be purchased by each
Underwriter shall be the same percentage (adjusted by the Representative to
eliminate fractions) of the total number of Option Shares to be purchased
by the Underwriters as such Underwriter is purchasing of the Firm Shares.
Such option may be exercised only to cover over-allotments in the sales of
the Firm Shares by the Underwriters and may be exercised in whole or in
part at any time on or before 12:00 noon, New York City time, on the
business day before the Firm Shares Closing Date (as defined below), and
only once thereafter within 30 days after the date of this Agreement, in
each case upon written or telegraphic notice, or verbal or telephonic
notice confirmed by written or telegraphic notice, by the Representative to
the Company no later than 12:00 noon, New York City time, on the business
day before the Firm Shares Closing Date or at least two business days
before the Option Shares Closing Date (as defined below), as the case may
be, setting forth the number of Option Shares to be purchased and the time
and date (if other than the Firm Shares Closing Date) of such purchase.
(c) On the Firm Shares Closing Date, the Company agrees to issue to
CIBC Oppenheimer Corp. for an aggregate price of $75.00 (for its own
account and not as the representative of the several Underwriters),
warrants (the "WARRANTS") to purchase an aggregate of 75,000 shares of
Common Stock (the "WARRANT SHARES") at a price per Warrant Share equal to
120% of the price to the public in the offering by the Underwriters of the
Firm Shares. The Warrants will be exercisable at any time and from time to
time on or after the first anniversary of the Effective Date (as defined
below) up to the fifth anniversary thereof. Each Warrant shall be
substantially identical to the form of Warrant filed as an exhibit to the
Registration Statement (as defined below).
2. DELIVERY AND PAYMENT. Delivery by the Company of the Firm Shares to
the Representative for the respective accounts of the Underwriters, and payment
of the purchase price by certified or official bank check or checks payable in
New York Clearing House (same day) funds to the Company, shall take place at the
offices of CIBC Oppenheimer Corp., at CIBC Oppenheimer Tower, One World
Financial Center, New York, New York 10281, at 10:00 a.m., New York City time
(or at such other place and time as may be agreed upon by the Representative and
the Company), (a) on the third (3rd) full business day following the first day
that Firm Shares are traded or (b) if this Agreement is executed and delivered
after 4:30 p.m. New York time, the fourth (4th) full business day following the
day that this Agreement is executed and delivered or (c) at such other time and
date not later than seven (7) full business days following the first day that
Firm Shares are traded as the Representative and the Company may determine (or
at such time and date to which payment and delivery shall have been postponed
pursuant to SECTION 10), such time and date of payment and delivery being herein
called the "FIRM SHARES CLOSING DATE;" PROVIDED, HOWEVER, that if the Company
has not made available to the Representative copies of the Prospectus within the
time provided in SECTION 6(A), the Representative may, in its sole discretion,
postpone the Firm Shares Closing Date until no later than two (2) full business
days following delivery of copies of the Prospectus to the Representative.
2
<PAGE>
In the event the option with respect to the Option Shares is exercised,
delivery by the Company of the Option Shares to the Representative for the
respective accounts of the Underwriters and payment of the purchase price by
certified or official bank check or checks payable in New York Clearing House
(same day) funds to the Company shall take place at the offices of CIBC
Oppenheimer Corp. specified above (or such other place as may be agreed upon by
the Representative and the Company) at the time and on the date (which may be
the same date as, but in no event shall be earlier than, the Firm Shares Closing
Date) specified in the notice referred to in SECTION 1(B) (such time and date of
delivery and payment are called the "OPTION SHARES CLOSING DATE"). The Firm
Shares Closing Date and the Option Shares Closing Date are each called,
individually, a "CLOSING DATE" and, together, the "CLOSING DATES."
Certificates evidencing the Shares shall be registered in such names and
shall be in such denominations as the Representative shall request at least two
full business days before the Firm Shares Closing Date or, in the case of Option
Shares, on the day of notice of exercise of the option as described in SECTION
1(B) and shall be made available to the Representative for checking and
packaging, at such place as is designated by the Representative, on the full
business day before the Firm Shares Closing Date (or the Option Shares Closing
Date in the case of the Option Shares).
3. REGISTRATION STATEMENT AND PROSPECTUS; PUBLIC OFFERING. The Company
has prepared in conformity with the requirements of the Securities Act of 1933,
as amended (the "SECURITIES ACT"), and the published rules and regulations
thereunder (the "RULES") adopted by the Securities and Exchange Commission (the
"COMMISSION") a registration statement on Form SB-2 (No. 333-41129), including a
preliminary prospectus relating to the Shares, and has filed with the Commission
the Registration Statement (as hereinafter defined) and such amendments thereof
as may have been required to the date of this Agreement. Copies of such
Registration Statement (including all amendments thereof) and of the related
preliminary prospectus have heretofore been delivered by the Company to you.
The term "PRELIMINARY PROSPECTUS" means any preliminary prospectus (as described
in Rule 430 of the Rules) included at any time as a part of the Registration
Statement. The Registration Statement as amended at the time and on the date it
becomes effective (the "EFFECTIVE DATE"), including all exhibits and
information, if any, deemed to be part of the Registration Statement pursuant to
Rule 424(b) and Rule 430A of the Rules, is called the "REGISTRATION STATEMENT."
The term "PROSPECTUS" means the prospectus in the form first used to confirm
sales of the Shares (whether such prospectus was included in the Registration
Statement at the time of effectiveness or was subsequently filed with the
Commission pursuant to Rule 424(b) of the Rules).
The Company understands that the Underwriters propose to make a public
offering of the Shares, as set forth in and pursuant to the Prospectus, as soon
after the Effective Date and the date of this Agreement as the Representative
deems advisable. The Company hereby confirms that the Underwriters and dealers
have been authorized to distribute or cause to be distributed each preliminary
prospectus and are authorized to distribute the Prospectus (as from time to time
amended or supplemented if the Company furnishes amendments or supplements
thereto to the Underwriters).
3
<PAGE>
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each Underwriter as follows:
(a) On the Effective Date the Registration Statement complied, and on
the date of the Prospectus, on the date any post-effective amendment to the
Registration Statement shall become effective, on the date any supplement
or amendment to the Prospectus is filed with the Commission and on each
Closing Date, the Registration Statement and the Prospectus (and any
amendment thereof or supplement thereto) will comply, in all material
respects, with the applicable provisions of the Securities Act and the
Rules and the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), and the rules and regulations of the Commission thereunder; the
Registration Statement did not, as of the Effective Date, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and on the other dates referred to above neither the
Registration Statement nor the Prospectus, nor any amendment thereof or
supplement thereto, will contain any untrue statement of a material fact or
will omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. When any
related preliminary prospectus was first filed with the Commission (whether
filed as part of the Registration Statement or any amendment thereto or
pursuant to Rule 424(a) of the Rules) and when any amendment thereof or
supplement thereto was first filed with the Commission, such preliminary
prospectus as amended or supplemented complied in all material respects
with the applicable provisions of the Securities Act and the Rules and did
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. Notwithstanding the foregoing, the Company makes no
representation or warranty as to the paragraphs with respect to
stabilization and passive market making on the inside front cover page of
the Prospectus and the statements contained under the caption
"Underwriting" in the Prospectus. The Company acknowledges that the
statements referred to in the previous sentence constitute the only
information furnished in writing by the Representative on behalf of the
several Underwriters, or by any other Underwriter, specifically for
inclusion in the Registration Statement, any preliminary prospectus or the
Prospectus.
(b) All contracts and other documents required to be filed as
exhibits to the Registration Statement have been filed with the Commission
as exhibits to the Registration Statement.
(c) The financial statements of the Company (including all notes and
schedules thereto) included in the Registration Statement and Prospectus
present fairly the financial position, the results of operations and cash
flows and the stockholders' equity and the other information purported to
be shown therein of the Company at the respective dates and for the
respective periods to which they apply; and such financial statements have
been prepared in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved, and all adjustments
necessary for a fair presentation of the results for such periods have been
made. The selected and summary
4
<PAGE>
financial data included in the Registration Statement present fairly the
information shown therein and have been compiled on a basis consistent
with the audited financial statements presented therein.
(d) Arthur Andersen LLP, whose reports are filed with the Commission
as a part of the Registration Statement, are and, during the periods
covered by their reports, were independent public accountants as required
by the Securities Act and the Rules.
(e) The Company's reincorporation from California to Delaware has
been completed with no adverse effect upon the business, assets, or
operations of the Company, and the Company has been duly incorporated and
is validly existing as a corporation in good standing under the laws of the
State of Delaware. Other than PharmaPrint B.V., the Company has no
subsidiary or subsidiaries and does not control, directly or indirectly,
any corporation, partnership, joint venture, association or other business
organization. The Company is duly qualified and in good standing as a
foreign corporation in each jurisdiction in which the character or location
of its assets or properties (owned, leased or licensed) or the nature of
its business makes such qualification necessary except for such
jurisdictions where the failure to so qualify would not have a material
adverse effect on the assets or properties, business, results of operations
or financial condition of the Company. Except as disclosed in the
Registration Statement and the Prospectus, the Company does not own, lease
or license any asset or property or conduct any business outside the United
States of America. The Company has all requisite corporate power and
authority, and has and is in compliance with the requirements and
conditions of, all necessary authorizations, approvals, consents, orders,
licenses, certificates and permits of and from all governmental or
regulatory bodies or any other person or entity, to own, lease and license
its assets and properties and conduct its businesses as now being conducted
and as described in the Registration Statement and the Prospectus except
for such authorizations, approvals, consents, orders, material licenses,
certificates and permits the failure to so obtain would not have a material
adverse effect upon the assets or properties, business, results of
operations, prospects or condition (financial or otherwise) of the Company;
no such authorization, approval, consent, order, license, certificate or
permit contains a materially burdensome restriction other than as disclosed
in the Registration Statement and the Prospectus; and the Company has all
such corporate power and authority, and such authorizations, approvals,
consents, orders, licenses, certificates and permits to enter into, deliver
and perform this Agreement and the Warrants and to issue and sell the
Shares and the Warrant Shares (except as may be required under the
Securities Act and state and foreign Blue Sky laws).
(f) (i) To the Company's knowledge, the Company owns or possesses
exclusive rights to use all patents, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names and copyrights
that are necessary to conduct its business as now conducted and as
described in the Registration Statement and Prospectus; except as set forth
in the Registration Statement and the Prospectus, the expiration of any
patents, patent rights, licenses, trade secrets, trademarks, service marks,
trade names or copyrights would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company; except as described in
5
<PAGE>
paragraph (viii) below, the Company has not received any notice of, and
has no knowledge of, any infringement of or conflict with asserted
rights of the Company by others with respect to any patent, patent
rights, licenses, inventions, trade secrets, know-how, trademarks,
service marks, trade names or copyrights; and the Company has not
received any notice of, and has no knowledge of, any infringement of or
conflict with asserted rights of others by the Company with respect to
any patent, patent rights, licenses, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, might have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company;
(ii) The Company has consulted with its patent counsel regarding
the persons who should be named as inventors on its pending patent
applications, and all such applications name all persons who should be
named as inventors therein under applicable laws and regulations;
(iii) All employees of the Company and all consultants to the
Company who perform material work for the Company have assigned to the
Company all rights to all inventions and works of authorship created by
them in the course and scope of their employment or engagement by the
Company;
(iv) The Company has conducted a diligent and thorough search
for, and has found no prior art that would reasonably be expected to
prevent the issuance of patents on the claims set forth in the Company's
pending patent applications or support an interference or invalidation
proceeding with respect to any patent issued on the Company's pending
patent applications.
(v) The Company is not aware of any other research or
development efforts that duplicate or are comparable to the PharmaPrint
Process as described in the Prospectus.
(vi) The Company's pending patent applications have been properly
prepared and filed in a timely manner so as to obtain the benefit of any
priority claimed from previously filed patent applications, include all
information and disclosures required under applicable law and regulations,
and are being diligently pursued by the Company.
(vii) All information submitted to the US Patent and
Trademark Office (the "USPTO") and any foreign or international patent
examining authority in connection with the Company's pending patent
applications and prosecution thereof is accurate, and the Company has not
made any material misrepresentation or concealed any material information
from the USPTO or any other patent examining authority in any such
applications or prosecution thereof.
(viii) The Company is not aware of any asserted or unasserted
claim or demand of any right in or to any of the patent rights of the
Company, including but not limited to a claim or demand of a shopright,
joint ownership, inventorship, or
6
<PAGE>
misappropriation, except for the claim by Costas Loullis, the Company's
former Senior Vice President for Research and Development, that he is a
co-inventor of the inventions that are the subject of the Company's
pending patent applications, which claim the Company has examined in
good faith with its patent counsel and its counsel retained for purposes
of its dispute with Dr. Loullis and believes to be without merit.
(ix) The Company has not sublicensed or otherwise transferred any
patent, trade secret, or other intellectual property.
(x) The Company has kept confidential and otherwise protected as
trade secret the techniques processes used in applying the PharmaPrint
Process described in the Prospectus.
(xi) All of the Company's subcontractors have entered into
confidentiality agreements prohibiting the use or disclosure of the
Company's trade secrets for any purpose other than work on behalf of the
Company.
(g) The Company has good title to each of the items of personal
property that are reflected in the financial statements referred to in
SECTION 4(C) or are referred to in the Registration Statement and the
Prospectus as being owned by it and valid and enforceable leasehold
interests in each of the items of real and personal property that are
referred to in the Registration Statement and the Prospectus as being
leased by it, in each case free and clear of all liens, encumbrances,
claims, security interests and defects, other than those described in the
Registration Statement and the Prospectus and those which do not and will
not have a material adverse effect upon the assets or properties, business,
results of operations or financial condition of the Company.
(h) Except as set forth in the Registration Statement and Prospectus,
there is no litigation or other dispute resolution proceeding or
governmental or other proceeding or investigation pending or, to the
Company's best knowledge, threatened (and the Company does not know of any
basis therefor) against the Company or any of its officers, directors,
employees or agents, or involving the assets, properties or business of,
the Company which would materially adversely affect the value or the
operation of any such assets or properties or the business, results of
operations, prospects or condition (financial or otherwise) of the Company.
(i) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as described
therein, (i) there has not been any material adverse change in the assets
or properties, business, results of operations, prospects or condition
(financial or otherwise), of the Company, whether or not arising from
transactions in the ordinary course of business; (ii) the Company has not
sustained any material loss or interference with its assets, businesses or
properties (whether owned or leased) from fire, explosion, earthquake,
flood or other calamity, whether or not covered by insurance, or from any
labor dispute or any court or legislative or other governmental action,
order or decree; and (iii) since the date of the latest balance sheet
included in the Registration Statement and the Prospectus, except as
reflected
7
<PAGE>
therein, the Company has not (a) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money,
except such liabilities or obligations incurred in the ordinary course
of business, (b) entered into any transaction not in the ordinary course
of business or (c) declared or paid any dividend or made any
distribution on any shares of its stock or redeemed, purchased or
otherwise acquired or agreed to redeem, purchase or otherwise acquire
any shares of its stock.
(j) There is no document or contract of a character required to be
described in the Registration Statement or Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required. Each agreement listed in the Exhibits to the Registration
Statement, other than items 10.6 and 10.7, is in full force and effect and
is valid and enforceable by and against the Company in accordance with its
terms, assuming the due authorization, execution and delivery thereof by
each of the other parties thereto. Neither the Company, nor to the best of
the Company's knowledge, any other party is in default in the observance or
performance of any term or obligation to be performed by it under any such
agreement, and no event has occurred which with notice or lapse of time or
both would constitute such a default, in any such case which default or
event would have a material adverse effect on the assets or properties,
business, results of operations, prospects or condition (financial or
otherwise) of the Company. No default exists, and, to the Company's
knowledge, no event has occurred which with notice or lapse of time or both
would constitute a default, in the due performance and observance of any
term, covenant or condition, by the Company of any other agreement or
instrument to which the Company is a party or by which it or its properties
or business may be bound or affected which default or event would have a
material adverse effect on the assets or properties, business, results of
operations, prospects or condition (financial or otherwise) of the Company.
(k) The Company is not in violation of any term or provision of its
charter or by-laws or of any franchise, license, permit, judgment, decree,
order, statute, law, rule or regulation, where the consequences of such
violation would have a material adverse effect on the assets or properties,
business, results of operations, prospects or condition (financial or
otherwise) of the Company.
(l) Neither the execution, delivery and performance of this Agreement
and the Warrants by the Company nor the consummation of any of the
transactions contemplated hereby (including, without limitation, the
issuance and sale by the Company of the Shares and the Warrants) will give
rise to a right to terminate or accelerate the due date of any payment due
under, or conflict with or result in the breach of any term or provision
of, or constitute a default (or an event which with notice or lapse of time
or both would constitute a default) under, or require any consent or waiver
under, or result in the execution or imposition of any lien, charge or
encumbrance upon any properties or assets of the Company pursuant to the
terms of, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Company is a party or by which it or any of its
properties or businesses is bound, or any franchise, license, permit,
judgment, decree, order, statute, rule or regulation applicable to the
Company or violate any provision of
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the charter or by-laws of the Company, except for such consents or
waivers which have already been obtained and are in full force and
effect.
(m) The Company has an authorized and outstanding capital stock as
set forth under the caption "Description of Capital Stock" in the
Prospectus. All of the outstanding shares of Common Stock have been duly
and validly issued and are fully paid and nonassessable and none of them
was issued in violation of any preemptive or other similar right. The
Company has reserved and kept available for the exercise of the Warrants
such number of authorized but unissued shares as are sufficient to permit
the exercise in full of the Warrants. The Shares, when issued and sold
pursuant to this Agreement, and the Warrant Shares, when issued and sold
pursuant to the Warrants, will be duly and validly issued, fully paid and
nonassessable and free of any pledge, lien, security interest, encumbrance,
claim or equitable interest, and none of them will be issued in violation
of any preemptive, co-sale, registration, first refusal, or other similar
right. The certificates for the Shares are in due and proper form and the
holders of the Shares, Warrants, and the Warrant Shares, after making
payment therefor, will not be subject to personal liability by reason of
being such holders. Except as disclosed in the Registration Statement and
the Prospectus, there is no outstanding option, warrant or other right
calling for the issuance of, and there is no commitment, plan or
arrangement to issue, any share of stock of the Company or any security
convertible into, or exercisable or exchangeable for, such stock. The
Common Stock, the Shares and the Warrants conform in all material respects
to all statements in relation thereto contained in the Registration
Statement and the Prospectus.
(n) No holder of any security of the Company has the right (which has
not been waived) to have any security owned by such holder included in the
Registration Statement or to demand registration of any security owned by
such holder during the period ending 180 days after the date of this
Agreement. Each director and executive officer of the Company has
delivered to the Representative his enforceable written agreement that he
will not, for a period of 180 days (except with respect to an aggregate of
200,000 shares owned by Elliott Friedman and Robert Burgess, 120 days)
after the date of this Agreement, offer for sale, sell, distribute, grant
any option for the sale of, or otherwise dispose of, directly or
indirectly, or exercise any registration rights with respect to, any shares
of Common Stock (or any securities convertible into, exercisable for, or
exchangeable for any shares of Common Stock) owned by him, without the
prior written consent of the Representative.
(o) All necessary corporate action has been duly and validly taken by
the Company to authorize the execution, delivery and performance of this
Agreement and the Warrants and the issuance and sale of the Shares, the
Warrants and the Warrant Shares by the Company. This Agreement has been,
and the Warrants on the Firm Shares Closing Date will be, duly and validly
authorized, executed and delivered by the Company and constitute and will
constitute legal, valid and binding obligations of the Company enforceable
against the Company in accordance with their respective terms, except (A)
as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement
of creditors' rights generally and by general equitable principles and (B)
to the extent that rights to indemnity or
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contribution under this Agreement may be limited by Federal and state
securities laws or the public policy underlying such laws.
(p) The Company is not involved in any labor dispute nor, to the
knowledge of the Company, is any such dispute threatened, which dispute
would have a material adverse effect on the assets or properties, business,
results of operations, prospects or condition (financial or otherwise) of
the Company.
(q) No transaction has occurred between or among the Company and any
of its officers or directors or any affiliate or affiliates of any such
officer or director that is required to be described in and is not
described in the Registration Statement and the Prospectus.
(r) The Company has not taken, nor will it take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in, or which has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of
the Common Stock to facilitate the sale or resale of any of the Shares.
(s) The Company has filed all federal, state, local and foreign tax
returns which are required to be filed through the date hereof, or has
received extensions thereof, and has paid all taxes shown on such returns
and all assessments received by it to the extent that the same are material
and have become due.
(t) The Company maintains insurance with insurers of recognized
financial responsibility of the types and in the amounts generally deemed
prudent for its business and consistent with insurance coverage maintained
by similar companies in similar businesses, including, but not limited to,
insurance covering real and personal property owned or leased by the
Company against theft, damage, destruction, acts of vandalism, products
liability for clinical trials, errors and omissions, and all other risks
customarily insured against, all of which insurance is in full force and
effect; the Company has not been refused any insurance coverage sought or
applied for; and the Company does not have any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not materially
and adversely affect the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company.
(u) The Common Stock is registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and is
approved for inclusion in the Nasdaq National Market, and the Company has
taken no action designed to, or likely to have the effect of, terminating
the registration of the Common Stock under the Exchange Act or the
inclusion of the Common Stock in the Nasdaq National Market, nor has the
Company received any notification that the Commission or the Nasdaq
National Market is contemplating terminating such registration or approval,
other than as set forth in letters from Nasdaq to the Company dated
November , 1997 and December 24, 1997 related to the Company's failure
to meet listing standards. If the offering contemplated by this Agreement
is completed, the
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Company will meet the listing standards for the Nasdaq National Market
and the issues addressed in the Nasdaq letters described above will be
resolved.
(v) The Company has been advised by counsel concerning the Investment
Company Act of 1940, as amended (the "1940 ACT"), and the rules and
regulations thereunder, and the Company has in the past conducted, and the
Company intends in the future to conduct, its affairs in such a manner as
to ensure that it is not and will not become an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
1940 Act and such rules and regulations.
(w) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date, or any date on which Option Shares are
to be purchased, as the case may be, and (ii) completion of the
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than any Preliminary Prospectuses,
the Prospectus, the Registration Statement and other materials, if any,
permitted by the Act.
(x) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets,
(iii) access to assets is permitted only in accordance with management's
general or specific authorization, and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(y) The Company has conducted and is conducting its businesses in
compliance with all applicable federal, state, local and foreign statutes,
laws, rules, regulations, ordinances, codes, decisions, decrees, directives
and orders, except where the failure to do so would not, singly or in the
aggregate, have a material adverse effect on the condition (financial or
otherwise), assets or properties, business, results of operations, or
prospects of the Company.
(z) The Company has complied with all provisions of Florida
H.B. 1771, codified as Section 517.075 of the Florida statutes, and all
regulations promulgated thereunder relating to issuers doing business with
Cuba.
(aa) Except as described in the Prospectus, to the Company's
knowledge, there are no rulemaking or similar proceedings before any
federal, state, local or foreign government or regulatory bodies which
involve or affect the Company which, if the subject of an action
unfavorable to the Company would have a material adverse effect on the
condition (financial or otherwise), assets or properties, business, results
of operations, or prospects of the Company.
(bb) To the knowledge of the Company, no officer, director, employee,
or consultant of the Company is in violation of any non-competition,
non-disclosure, confidentiality or other similar agreement with any party
other than the Company, and no such person is expected to be in violation
thereof as a result of the business conducted or expected
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<PAGE>
to be conducted by the Company as described in the Prospectus or such
person's performance of his obligations to the Company.
(cc) (i) The Company has completed the pharmaprinting, as defined in
the Prospectus, of six of the seven Initial Products described in its U.S.
License Agreement with American Home Products ("AHP") (excluding garlic),
and is currently conducting process validation and formulation activities
for these six Initial Products. The pharmaprinting for the seventh of the
seven Initial Products, garlic, is expected to be completed in February
1998.
(ii) The Company has no reason to believe that it may be unable
to (A) meet its goal of achieving a National Launch Date, as defined
in its U.S. License Agreement with AHP, no later than July 1998, and
(B) perform all of its obligations under its U.S. License Agreement
with AHP, its Foreign License Agreement with AHP and its Supply
Agreement with AHP (the "AHP Agreements").
(iii) The Company has received no indication from AHP of any
intention of terminating or attempting to modify, in whole or part,
the AHP Agreements or the relationship between AHP and the Company.
(dd) (i) The Company's License Agreement with USC, as amended by
amendments No. 1 and 2 thereto (the "USC License Agreement") is in full
force and effect and has not been further modified or breached by USC. The
Company has received no indication from USC of any intention of terminating
or attempting to modify, in whole or part, the USC License Agreement or the
relationship between USC and the Company.
(ii) The Company has not sublicensed or otherwise transferred any
of its rights under the USC License Agreement.
(iii) Pursuant to the USC License Agreement, the Company has
exclusive commercial rights to USC's interests in the Company's patent
applications, any patents that issue thereon, the PharmaPrint Process
as described in the Prospectus, and the Company's technologies, for
purposes of the Company's entire business as described in the
Prospectus.
(iv) The Company has not surrendered any rights to any patent or
country under the USC License Agreement.
(v) The Company is in compliance with the USC License Agreement,
and all previous instances of noncompliance have been cured or waived.
(vi) For purposes of the Company's agreements with USC, Dr.
Tasneem Khwaja is, and for at least the last year has been, an
employee of the Company, not USC, and any inventions he makes or has
made within the past year within the scope of his employment with the
Company belong to the Company, not USC.
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(vii) The Research Agreement between the Company and USC was
never expanded in scope beyond mistletoe as described in the original
version of the agreement and has been terminated. No further work is
being conducted under the Research Agreement, and the Company has no
further payment obligations to USC thereunder.
(ee) The Company has participated in meetings with representatives of
the US Food and Drug Administration with responsibility for the regulation
of botanical pharmaceuticals and dietary supplements. The FDA has
cooperated with the Company and the Company has no reason to anticipate
regulatory difficulties in connection with any of its product development
plans, other than those common to all similar pharmaceutical development.
(ff) The Company's contract relationships are in good standing and the
Company has no reason to believe that any of its subcontractors may cease
working with the Company on substantially the same terms as have prevailed
to date.
5. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters under this Agreement are several and not joint. The respective
obligations of the Underwriters to purchase the Shares are subject to each of
the following terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission
in accordance with Section 6(a) of this Agreement.
(b) The Registration Statement shall have become effective not later
than 2:00 p.m., California time, on the date following the date of
execution and delivery of this Agreement, and no order preventing or
suspending the use of any preliminary prospectus or the Prospectus shall
have been or shall be in effect and no order suspending the effectiveness
of the Registration Statement or the qualification of the Shares for sale
in any jurisdiction shall be in effect and no proceedings for such purpose
shall be pending before or threatened by the Commission, and any requests
for additional information on the part of the Commission (to be included in
the Registration Statement or the Prospectus or otherwise) shall have been
complied with to the satisfaction of the Representative.
(c) The representations and warranties of the Company contained in
this Agreement and in the certificates delivered pursuant to SECTION 5(D)
shall be true and correct when made and on and as of each Closing Date as
if made on such date and the Company shall have performed all covenants and
agreements and satisfied all the conditions contained in this Agreement
required to be performed or satisfied by it at or before such Closing Date.
(d) You shall have received on each Closing Date a certificate of the
Company, dated the Closing Date signed by the Chief Executive Officer and
Chief Financial Officer of the Company, to the effect that, and you shall
be satisfied that:
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(i) The representations and warranties of the Company in this
Agreement and the Warrants are true and correct, as if made on and as
of the Closing Date and the Company has complied with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the
Act;
(iii) When the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate,
the Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained all material information required to be
included therein by the Act and the Rules and Regulations, and in all
material respects conformed to the requirements of the Act and the
Rules and Regulations, the Registration Statement, and any amendment
or supplement thereto, did not and does not include any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, the Prospectus, and any amendment or supplement thereto,
did not and does not include any untrue statement of a material fact
or omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been so set forth;
and
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not
been any (a) present or prospective material adverse change in the
condition (financial or otherwise), earnings, operations, business or
prospects of the Company, (b) any transaction that is material to the
Company, except transactions entered into in the ordinary course of
business, (c) any obligation, direct or contingent, that is material
to the Company, entered into or committed to by the Company other than
as described in the Registration Statement and the Prospectus, (d) any
change in the capital stock of the Company, (e) any change in the
outstanding indebtedness of the Company that is material to the
Company or is out of the ordinary course of business of the Company,
(f) any dividend or distribution of any kind declared, paid or made on
the capital stock of the Company, other than as described in the
Registration Statement and the Prospectus, or (g) any loss or damage
(whether or not insured) to the property of the Company which has been
sustained or will have been sustained which has a material adverse
effect on the condition (financial or otherwise), earnings,
operations, business or prospects of the Company.
(e) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to
be purchased, as the case may be, there shall not have been any (i) present
or prospective change in the condition (financial or otherwise), earnings,
operations, properties, assets, business or prospects of the Company from
that set forth in the Registration Statement or Prospectus, which, in your
sole judgment, is material and adverse to the Company and that makes it, in
your sole judgment, impracticable or
14
<PAGE>
inadvisable to proceed with the public offering of the Shares as
contemplated by the Prospectus; (ii) any transaction that is material to
the Company entered into or committed to by the Company other than as
described in the Registration Statement and the Prospectus; or (iii) any
material obligation, contingent or otherwise, directly or indirectly,
incurred by the Company other than as described in the Registration
Statement and the Prospectus.
(f) You shall have received on each Closing Date a letter from
Arthur Andersen LLP, Independent Auditors ("ANDERSEN"), addressed to
the Underwriters, dated such Closing Date (in each case, the "BRING DOWN
LETTER"), confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act
and the applicable published Rules and based upon the procedures
described in a letter delivered to you concurrently with the execution
of this Agreement (herein called the "ORIGINAL LETTER"), but carried out
to a date not more than five (5) business days prior to the Closing Date
(i) confirming, to the extent true, that the statements and conclusions
set forth in the Original Letter are accurate as of the Closing Date,
(ii) stating that there were not any material increases in the current
liabilities and long-term liabilities of the Company or any material
decreases in net income or in working capital or the stockholders'
equity in the Company, as compared with the amounts shown on the
Company's audited balance sheet for the fiscal year ended March 31, 1997
and the six months ended September 30, 1997 included in the Registration
Statement; and (iii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter that are
necessary to reflect any changes in the facts described in the Original
Letter since its date, or to reflect the availability of more recent
financial statements, data or information. The Bring Down Letter shall
not disclose any change in the condition (financial or otherwise),
earnings, operations, properties, assets, business or prospects of the
Company from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it,
in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. The
Original Letter from Andersen shall be addressed to or for the use of
the Underwriters in form and substance satisfactory to the Underwriters
and shall (i) represent that they are independent certified public
accountants with respect to the Company within the meaning of the Act
and the Rules, (ii) set forth their opinion with respect to their
examination of the balance sheet of the Company as of March 31, 1997 and
related statements of operations, equity and cash flows for the twelve
(12) months ended March 31, 1997, (iii) state that Andersen has
performed the procedures set out in Statement of Accounting Standards
No. 71 ("SAS 71") for a review of interim financial information and
providing the report of Andersen as described in SAS 71 on the financial
statements for the six-month period ended September 30, 1997 (the
"INTERIM STATEMENTS"), (iv) state that in the course of such review,
nothing came to their attention that leads them to believe that any
material modifications need to be made to any of the Interim Statements
in order for them to be in compliance with generally accepted accounting
principles consistently applied across the periods presented, (v) state
that nothing came to their attention that caused them to believe that
the financial statements included in the Registration Statement and
Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Rules and that any adjustments
thereto have not been properly applied to the historical amounts in the
compilation of such statements, (vi) state that they have performed
certain procedures
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agreed upon with the Representative as a result of which they determined
that certain information of an accounting, financial or statistical
nature (which is limited to accounting, financial or statistical
information derived from the general accounting records of the Company)
set forth in the Registration Statement and the Prospectus and
reasonably specified by the Representative agrees with the accounting
records of the Company; and (vii) address other matters agreed upon by
Andersen and you. In addition, you shall have received from Andersen a
letter addressed to the Company and made available to you for the use of
the Underwriters stating that their review of the Company's system of
internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's financial
statements as of March 31, 1997, did not disclose any weaknesses in
internal controls that they considered to be material weaknesses.
(g) The Representative shall have received on each Closing Date from
Klehr, Harrison, Harvey, Branzburg & Ellers LLP, counsel for the Company,
an opinion, addressed to the Representative and the other Underwriters and
dated such Closing Date, and stating in effect that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of
Delaware. To such counsel's knowledge, the Company has no subsidiary,
other than PharmaPrint B.V., and does not control, directly or
indirectly, any corporation, partnership, joint venture, association
or other business organization. The Company is duly qualified and in
good standing as a foreign corporation in California.
(ii) The Company has all requisite corporate power and authority
to own, lease and license its assets and properties and conduct its
business as now being conducted and as described in the Registration
Statement and the Prospectus; and the Company has all requisite
corporate power and authority to enter into, deliver and perform this
Agreement and the Warrants.
(iii) The Company has authorized, issued and outstanding
capital stock as set forth in the Registration Statement and the
Prospectus under the heading "Description of Capital Stock -- Common
Stock;" the certificates evidencing the Shares are in proper legal
form and have been duly authorized for issuance by the Company; all of
the outstanding shares of Common Stock of the Company have been duly
and validly authorized and have been duly and validly issued and are
fully paid and nonassessable and, to such counsel's knowledge, none of
them was issued in violation of any preemptive, co-sale, registration,
first refusal, or other similar right. The Warrant Shares have been
duly authorized and reserved by the Company. The Shares when issued
and sold pursuant to this Agreement and the Warrant Shares, when
issued and sold pursuant to the Warrants, will be validly issued,
fully paid and nonassessable and none of them will have been issued in
violation of or subject to any preemptive, co-sale, registration,
first refusal, or other similar right provided by applicable law or
the Company's charter or bylaws or otherwise known to such counsel.
To the best of such counsel's knowledge, except as disclosed in the
Registration Statement and the Prospectus, there is no
16
<PAGE>
outstanding option, warrant or other right calling for the issuance
of, and no commitment, plan or arrangement to issue, any share of
stock of the Company or any security convertible into, exercisable
for, or exchangeable for stock of the Company. The Common Stock,
the Shares and the Warrants conform in all material respects to the
descriptions thereof contained in the Registration Statement and
the Prospectus.
(iv) All necessary corporate action has been validly taken by the
Company to authorize the execution, delivery and performance of this
Agreement, the execution, delivery and performance of the Warrants and
the issuance and sale of the Shares, the Warrants and the Warrant
Shares. This Agreement has been validly authorized, executed and
delivered by the Company (and the Warrants will have been validly
executed and delivered by the Company when paid for on the Firm Shares
Closing Date) and this Agreement constitutes the valid and binding
obligation of the Company (and the Warrants when so executed and
delivered will constitute the valid and binding obligation of the
Company), enforceable against the Company in accordance with their
respective terms except (A) as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws affecting the enforcement
of creditors' rights generally and by general equitable principles
(regardless of whether enforceability is considered in a proceeding at
law or in equity) and (B) to the extent that rights to indemnity or
contribution under this Agreement may be limited by federal or state
securities laws or the public policy underlying such laws.
(v) Neither the execution, delivery and performance of this
Agreement by the Company nor the consummation of any of the
transactions contemplated hereby (including, without limitation, the
issuance and sale by the Company of the Shares, Warrants and Warrant
Shares) will give rise to a right to terminate or accelerate the due
date of any payment due under, or conflict with or result in the
breach of any term or provision of, or constitute a default (or any
event that with notice or lapse of time, or both, would constitute a
default) under, or require consent or waiver under, or result in the
execution or imposition of any lien, charge or encumbrance upon any
properties or assets of the Company pursuant to the terms of any
indenture, mortgage, deed trust, note or other agreement or instrument
that has been filed as an Exhibit to the Registration Statement and to
which the Company is a party or by which it or any of its properties
or businesses is bound, or any franchise, license, permit, judgment,
decree, order, statute, rule or regulation of which such counsel is
aware or violate any provision of the charter or by-laws of the
Company.
(vi) To such counsel's knowledge, no default exists, and no event
has occurred which with notice or lapse of time, or both, would
constitute a default, in the due performance and observance of any
agreement or instrument filed as an exhibit to the Registration
Statement, where the consequences of such default would have a
material and adverse effect on the assets, properties, business,
results of operations, prospects or condition (financial or otherwise)
of the Company.
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(vii) To such counsel's knowledge, the Company is not in
violation of any term or provision of its charter or by-laws or any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation, where the consequences of such violation would have a
material and adverse effect on the assets or properties, businesses,
results of operations, prospects or condition (financial or otherwise)
of the Company.
(viii) No consent, approval, authorization or order of any
court or governmental agency or body is required for the performance
of this Agreement or the Warrants by the Company or the consummation
by the Company of the transactions contemplated hereby or thereby,
except such as have been obtained under the Securities Act and such as
may be required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the several
Underwriters.
(ix) Except as discussed in the Registration Statement and
Prospectus, to such counsel's knowledge, there is no litigation or
governmental or other proceeding or investigation, before any court or
administrative authority pending or threatened against, or involving
the assets, properties or businesses of, the Company which would have
a material adverse effect upon the assets or properties, business,
results of operations, prospects or condition (financial or otherwise)
of the Company.
(x) The statements in the Prospectus under the captions, "Risk
Factors--Dependence on AHP" and "-- Potential Adverse Effects of
Shares Eligible for Future Sale;" "Management--Limitation of Liability
and Indemnification Matters," "--Employment and Personal Service
Agreements," and "--1995 Stock Option Plan;" "Certain Transactions,"
and "Description of Capital Stock," insofar as such statements
constitute a summary of documents referred to therein or matters of
law, are fair summaries in all material respects and accurately
present the information called for with respect to such documents and
matters. All contracts and other documents of which such counsel is
aware which are required to be filed as exhibits to, or described in,
the Registration Statement have been so filed with the Commission or
are fairly described in the Registration Statement, as the case may
be.
(xi) The Registration Statement as of its effective date, and the
Prospectus and each amendment or supplement thereto (except for the
financial statements and notes and schedules thereto and other
financial and statistical data included therein or excluded therefrom,
as to which such counsel expresses no opinion) appeared on their face
to be appropriately responsive in all material respects to the
requirements of the Securities Act and the Rules.
(xii) The Registration Statement has become effective under
the Securities Act, any required filing of the Prospectus, pursuant to
Rule 424(b) has been made in the manner and within the time required
by Rule 424(b), and to such
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counsel's knowledge no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are threatened, pending or
contemplated.
(xiii) The Company is not an "investment company" or a person
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
To the extent deemed advisable by such counsel, they may rely as to
matters of fact on certificates and representations of responsible
officers of the Company and public officials and on the opinions of
other counsel satisfactory to the Representative as to matters which
are governed by laws other than the laws of the Commonwealth of
Pennsylvania, the General Corporation Law of the State of Delaware and
the federal laws of the United States; provided that such counsel
shall state that in their opinion the Underwriters and they are
justified in relying on such other opinions. Copies of such
certificates and other opinions shall be furnished to the
Representative and counsel for the Underwriters.
In addition, such counsel shall state that such counsel has acted as
outside corporate legal counsel to the Company and participated in
conferences with officers and other representatives of the Company,
representatives of the Representative and representatives of the
independent certified public accountants of the Company, at which
conferences the contents of the Registration Statement and the
Prospectus and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in
the Registration Statement and the Prospectus (except as specified in
the foregoing opinion), on the basis of the foregoing, no facts have
come to the attention of such counsel which lead such counsel to
believe that the Registration Statement (except with respect to the
financial statements and notes and schedules thereto and other
financial and statistical data included therein or excluded therefrom,
as to which such counsel need express no belief) at the time it became
effective and at all times subsequent thereto up to and on the Closing
Date contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus as
amended or supplemented (except with respect to the financial
statements and notes and schedules thereto and other financial and
statistical data included therein or excluded therefrom, as to which
such counsel need make no statement) on the date thereof contained any
untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(h) The Representative shall have received on each Closing Date from
Pennie & Edmonds LLP ("P&E"), patent counsel for the Company, an opinion,
addressed to the Representatives and the other Underwriters and dated such
Closing Date, and stating in effect that:
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(i) The Company's patent applications "Pharmaceutical Grade
Botanical Drugs," U.S. Patent Application No. 08/838,198, filed April
15, 1997 (the "Broad Process Application"), and international
counterpart thereof, and 11 patent applications filed October 23, 1997
with the United States Patent and Trademark Office (the "PTO")
entitled "Pharmaceutical Grade: (1) Saw Palmetto, (2) St. John's
Wort, (3) Echinacea, (4) Valerian, (5) Ginseng, (6) Black Cohosh, (7)
Agnus Castus, (8) Garlic, (9) Ginkgo Biloba, (10) Bilberry, and (11)
Milk Thistle" (the "SPECIFIC APPLICATIONS") (the Broad Process
Application and the Specific Applications referred to herein as the
"P&E Filed Applications") (i) have been properly prepared and filed in
a timely manner so as to obtain the benefit of any priority claimed
from previously filed United States patent applications, and
(ii) include all information and disclosures required under applicable
law and regulations, and all of the Applications are being diligently
pursued by the Company.
(ii) To the best of P&E's knowledge, all information submitted to
the PTO and to any foreign or international patent examining authority
in the P&E Filed Applications and U.S. patent application Nos.
08/774,500 and 08/796,487 entitled "Mistletoe Extract and Method" and
U.S. patent application No. 08/632,273 entitled "Pharmaceutical Grade
Botanical Drugs" (collectively, together with the P&E Filed
Applications, the "Applications") and in connection with prosecution
thereof is accurate, and neither P&E nor, again to P&E's knowledge,
the Company made any material misrepresentation or concealed any
material information from the PTO or any other patent examining
authority in any of the Applications, or in connection with the
prosecution thereof.
(iii) To the best of P&E's knowledge, the Company has
provided such firm with references and background materials related to
its technologies and the application of these technologies to specific
botanical materials, some of which may constitute prior art to one or
more of the Applications. In addition, P&E has received prior art
cited by the United States Patent and Trademark Office in connection
with the Applications and issued U.S. patents and prior art identified
by the European Patent Office acting as the International Search
Agency for PCT applications corresponding to United States patent
application No. 08/422,438 filed in the United States Patent Office on
April 14, 1995 and No. 08/838,198 filed on April 15, 1997, the
prosecution of said applications for which P&E took over the
responsibility, on behalf of the Company. P&E has diligently reviewed
these materials and believes that these materials constitute prior art
that, as properly understood, described correctly and distinguished
should not defeat the patentability of the claims now pending in any
of the Applications under 35 U.S.C. Sections 102 or 103 or themselves
result in invalidation of any such claims of any patent Licensed to
the Company or any patent that might issue on any of the
Applications. Furthermore, all material prior art as defined in
37 C.F.R. Section 56(b) known to P&E has been disclosed to the PTO.
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(iv) Claim 1 of the Broad Process Application, as well as each
claim listed in paragraph vii below, each in substantially its current
form, is patentable over all prior art of which P&E is currently aware
and the application of the process of those claims to specific
botanical compositions as described in the claims of The Specific
Applications, is patentable over all prior art of which P&E is
currently aware.
(v) The PharmaPrint Process, as described in the Registration
Statement and Prospectus, is disclosed in and covered by the present
claims of the P&E Filed Applications; conversely, the P&E Filed
Applications cover the use of the PharmaPrint Process, as so
described, in connection with both the Company's proposed dietary
supplement and pharmaceutical products.
(vi) P&E has not searched for, and nothing has come to P&E's
attention to lead P&E to believe that there currently is any process
by which a competitor to the Company is producing or offering for sale
botanical compositions in which the bioactive components and their
bioactivity was determined, composition of bioactive components was
quantified and standardized without practicing the invention of one or
more of the pending claims of the P&E Filed Applications.
(vii) Issuance of the pending claims identified in the
following table will satisfy the patent coverage condition to the
obligation of AHP to pay royalties to the Company on net sales of the
specified products pursuant to the AHP Agreements.
COVERED PRODUCT PATENT APPLICATION SERIAL NUMBER
08/838,198 FILED APRIL 15, 1997, CLAIMS
Saw Palmetto " claims 3, 4, 35
St. John's Wort " claims 3, 4, 37
Valerian " claims 3, 4, 39
Echinacea " claims 3, 4, 17
Ginkgo Biloba " claims 3, 4, 22
Ginseng " claims 3, 4, 23
Garlic " claims 3, 4, 20
Black Cohosh " claims 3, 4, 14
Agnus Castus " claims 3, 4, 11
Bilberry " claims 3, 4, 13
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Milk Thistle " claims 3, 4, 30
Ginger " claims 3, 4, 21
(viii) To P&E's knowledge, each of the patent applications and
patents identified herein before is exclusively Licensed to the
Company with the right to sublicense same and, to P&E's knowledge,
except as set forth in the Prospectus, no other entity or individual
has any right in any of the Applications or any patent that may be
issued therefrom.
(ix) The statements in the Registration Statement and the
Prospectus under the captions "Risk Factors -- Dependence on AHP,"
"Risk Factors -- Dependence on Patents and Other Proprietary Rights;
Uncertainty of Patent Protection and Proprietary Rights," "Business --
PharmaPrint Process," and "Business -- Intellectual Property"
(collectively, the "Patent Paragraphs"), in each case insofar as such
statements constitute matters of fact, law or conclusions thereunder
related to patents and patent applications of the Company, are as of
the date of the Prospectus, correct in all material respects and
present fairly the information purported to be shown and do not
contain any untrue statement of material fact required to be stated
therein.
(x) Except as set forth in the next sentence, P&E is currently
unaware of: (i) any judicial proceedings pending or threatened
related to patents Licensed to the Company or to the Applications; or
(ii) any notice of infringement of asserted rights of others directed
to the Company or any notice to the Company challenging the validity,
scope or enforceability of any of the patents Licensed to the Company
or any of the Applications; (iii) any basis to know that the Company's
practice of its PharmaPrint Process, as described in the Registration
Statement and Prospectus and the Applications, will infringe upon or
otherwise violate any patent rights of others; and (iv) any
infringement by others of patent rights Licensed to the Company. P&E
has been advised by the Company that, in a pending action, Costas
Loullis, Ph.D., the Company's former Group Senior Vice President of
Research and Development, has made claims against the Company
asserting ownership rights in the Company's patent applications.
However, based on interactions with the Company and its employees and
information received from the Company in preparing the P&E Filed
Applications, it is our belief and opinion that Dr. Loullis is not an
inventor of the inventions set forth in any of the claims of the P&E
Filed Applications and should not be named as an inventor in any of
the P&E Filed Applications. P&E has no knowledge that the Company
does not own or possess sufficient patent and proprietary rights, to
license and enforce all material patents and patent applications
should they issue to patent with the claims now pending therein.
In addition, although P&E shall state that although it has not
independently verified the accuracy, completeness or fairness of the
statements contained in the
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<PAGE>
Registration Statement and the Prospectus other than as specifically
stated herein, nothing has come to P&E's attention that leads P&E to
believe that the Patent Paragraphs of the Registration Statement,
at the time the Registration Statement became effective or at the
date hereof, contained or contain an untrue statement of a material
fact or omitted or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or that the Patent Paragraphs of the Prospectus, as of
the date of the Prospectus or at the date hereof, contained or
contain an untrue statement of a material fact or omitted or omit
to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(i) The Representative shall have received on each Closing Date from
Kleinfeld, Kaplan & Becker, regulatory counsel for the Company, an opinion,
addressed to the Representative and the other Underwriters and dated such
Closing Date, and stating in effect that the statements in the Prospectus
under the captions "Risk Factors -- Government Regulation: No Assurance of
Regulatory Approval" and "Business -- Government Regulation," insofar as
such statements constitute summaries of documents referred to therein or
matters of law, are fair summaries in all material respects and accurately
present the information called for with respect to such documents and
matters.
(j) The Shares shall have been approved for inclusion in the Nasdaq
National Market.
(k) The Company shall have executed and delivered the Warrants.
(l) The Company shall have furnished to you such further certificates
and documents as you shall reasonably request (including certificates of
officers of the Company) as to the accuracy of the representations and
warranties of the Company herein, as to the performance by the Company of
its obligations hereunder and as to the other conditions concurrent and
precedent to the obligations of the Underwriters hereunder.
(m) All proceedings taken in connection with the sale of the Firm
Shares and the Option Shares as herein contemplated shall be reasonably
satisfactory in form and substance to the Representative and its counsel
and the Underwriters shall have received from Gibson, Dunn & Crutcher LLP a
favorable opinion, addressed to the Representative and dated such Closing
Date, with respect to the Shares, the Registration Statement and the
Prospectus, and such other related matters, as the Representative may
reasonably request, and the Company shall have furnished to Gibson, Dunn &
Crutcher LLP such documents as they may reasonably request for the purpose
of enabling them to pass upon such matters.
6. COVENANTS OF THE COMPANY. The Company covenants and agrees as
follows:
(a) The Company shall prepare the Prospectus in a form approved by
the Representative and file such Prospectus pursuant to Rule 424(b) under
the Securities Act
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not later than the Commission's close of business on the
second business day following the execution and delivery of this Agreement,
or, if applicable, such earlier time as may be required by Rule 430A under
the Securities Act, and shall promptly advise the Representative (i) when
any amendment to the Registration Statement shall have become effective,
(ii) of any request by the Commission for any amendment of the Registration
Statement or the Prospectus or for any additional information, (iii) of the
prevention or suspension of the use of any preliminary prospectus or the
Prospectus or of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (iv) of
the receipt by the Company of any notification with respect to the
suspension of the qualification of the Shares for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose. The
Company shall not file any amendment of the Registration Statement or
supplement to the Prospectus unless the Company has furnished the
Representative a copy for its review prior to filing and shall not file any
such proposed amendment or supplement to which the Representative
reasonably objects. The Company shall use its best efforts to prevent the
issuance of any such stop order and, if issued, to obtain as soon as
possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the Shares is
required to be delivered under the Securities Act and the Rules, any event
occurs as a result of which the Prospectus as then amended or supplemented
would include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall be
necessary to amend or supplement the Prospectus to comply with the
Securities Act or the Rules, the Company promptly shall prepare and file
with the Commission, subject to the second sentence of SECTION 6(A), an
amendment or supplement which shall correct such statement or omission or
an amendment which shall effect such compliance.
(c) The Company shall make generally available to its security
holders and to the Representative as soon as practicable, but not later
than 45 days after the end of the 12-month period beginning at the end of
the fiscal quarter of the Company during which the Effective Date occurs
(or 90 days if such 12-month period coincides with the Company's fiscal
year), an earning statement (which need not be audited) of the Company,
covering such 12-month period, which shall satisfy the provisions of
Section 11(a) of the Securities Act or Rule 158 of the Rules.
(d) The Company shall furnish to the Representative and counsel for
the Underwriters, without charge, signed copies of the Registration
Statement (including all exhibits thereto and amendments thereof) and to
each other Underwriter a copy of the Registration Statement (without
exhibits thereto) and all amendments thereof and, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the Securities
Act or the Rules, as many copies of any preliminary prospectus and the
Prospectus and any amendments thereof and supplements thereto as the
Representative may reasonably request.
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<PAGE>
(e) The Company shall cooperate with the Representative and its
counsel in endeavoring to qualify the Shares for offer and sale under the
laws of such jurisdictions as the Representative may designate and shall
maintain such qualifications in effect so long as required for the
distribution of the Shares; provided, however, that the Company shall not
be required in connection therewith, as a condition thereof, to qualify as
a foreign corporation or to execute a general consent to service of process
in any jurisdiction or subject itself to taxation as doing business in any
jurisdiction.
(f) For a period of five years after the date of this Agreement, the
Company shall supply to the Representative, and to each other Underwriter
who may so request in writing, copies of such financial statements and
other periodic and special reports as the Company may from time to time
distribute generally to the holders of any class of its capital stock and
to furnish to the Representative a copy of each annual or other report it
shall be required to file with the Commission.
(g) Without the prior written consent of the Representative, for a
period of 180 days after the date of this Agreement, the Company shall not
issue, sell, or register under the Securities Act or register or qualify
under any state blue sky law (for offer or sale by the Company or any
stockholder), or otherwise dispose of, directly or indirectly, any equity
securities of the Company (or any securities convertible into or
exercisable or exchangeable for equity securities of the Company), except
for the issuance of the Shares pursuant to the Registration Statement and
the issuance of shares in private placement transactions without
registration under the Securities Act within such 180-day period,
(i) pursuant to the Company's existing stock option plan, (ii) upon
exercise of the Warrants or warrants outstanding on the date hereof, or
(iii) in connection with institutional or bank financing, merger or
acquisition transactions, or joint venture or strategic relationships,
other than under Regulation S or Rule 144A under the Securities Act.
(h) On or before completion of this offering, the Company shall make
all filings required under applicable securities laws and by the Nasdaq
National Market (including any required registration under the Exchange
Act) and use its best efforts cause the Shares to be approved for trading
on the Nasdaq National Market.
(i) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(j) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which
may be the same entity as the transfer agent) for its Common Stock.
(k) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in
your opinion the market price of the Common Stock has been or is likely to
be materially affected (regardless of whether such rumor, publication or
event necessitates a supplement to or amendment of the Prospectus), the
Company will, after written
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<PAGE>
notice from you advising the Company to the effect set forth above,
forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor,
publication or event.
(l) The Company will refrain from investing the proceeds of the sale
of the Shares in such a manner as to cause the Company to become an
"investment company" within the meaning of the 1940 Act.
(m) The Company will furnish to you as early as practicable before
each Closing Date but not later than two business days prior thereto, a
copy of the latest available unaudited interim consolidated financial
statements, if any, of the Company that have been read by the Company's
independent certified public accountants as stated in their letter to be
furnished pursuant to SECTION 5(F).
(n) On the Closing Date, the Company will sell the Warrants to the
Representatives.
(o) The Company shall pay, or reimburse if paid by the
Representative, whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, all costs and expenses
incident to the public offering of the Shares and the performance of the
obligations of the Company under this Agreement including those relating
to: (i) the preparation, printing, filing and distribution of the
Registration Statement including all exhibits thereto, each preliminary
prospectus, the Prospectus, all amendments and supplements to the
Registration Statement and the Prospectus, and the printing, filing and
distribution of this Agreement; (ii) the preparation and delivery of
certificates for the Shares to the Underwriters and the Warrants to the
Representative; (iii) the registration or qualification or exemption of the
Shares for offer and sale under the securities or Blue Sky laws of the
various jurisdictions referred to in Section 6(e), including the reasonable
fees and disbursements of counsel for the Underwriters in connection with
such registration and qualification or exemption and the preparation,
printing, distribution and shipment of preliminary and supplementary Blue
Sky memoranda; (iv) the furnishing (including costs of shipping and
mailing) to the Representative and to the Underwriters of copies of each
preliminary prospectus, the Prospectus and all amendments or supplements to
the Prospectus, and of the several documents required by this Section to be
so furnished, as may be reasonably requested for use in connection with the
offering and sale of the Shares by the Underwriters or by dealers to whom
Shares may be sold; (v) the filing fees of the National Association of
Securities Dealers, Inc. in connection with its review of the terms of the
public offering; (vi) the furnishing (including costs of shipping and
mailing) to the Representative and to the Underwriters of copies of all
reports and information required by Section 6(f); (vii) inclusion of the
Shares for quotation on the Nasdaq National Market; and (viii) all transfer
taxes, if any, with respect to the sale and delivery of the Shares by the
Company to the Underwriters. In addition, whether or not the transactions
contemplated hereby are consummated or this Agreement is terminated, the
Company shall pay, or reimburse if paid by the Representative, all
out-of-pocket costs and expenses incurred by the
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Underwriters in connection with the transactions contemplated by this
Agreement or in contemplation of performing their obligations hereunder
and not otherwise payable by the Company pursuant hereto, including,
without limitation, road show costs, marketing costs, and fees and
disbursements of counsel for the Underwriters.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act and each of the agents, employees, officers and directors of
any of them against any and all losses, claims, damages and liabilities,
joint or several (including any reasonable investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement of,
any action, suit or proceeding or any claim asserted), to which they, or
any of them, may become subject under the Securities Act, the Exchange Act
or other federal or state law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities arise out of or are
based upon (i) any breach of any representation, warranty, or agreement of
the Company herein contained, (ii) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
amendment thereof or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (iii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus or any amendment thereof or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, and agrees to reimburse each indemnitee for any legal
or other expenses reasonably incurred by it in connection with
investigating or defending any such loss, claim, damage, or liabilities;
provided, however, that such indemnity shall not inure to the benefit of
any Underwriter (or any person controlling such Underwriter) on account of
any losses, claims, damages or liabilities arising from the sale of the
Shares to any person by such Underwriter if such untrue statement or
omission or alleged untrue statement or omission was made in such
preliminary prospectus, the Registration Statement or the Prospectus, or
such amendment or supplement, in reliance upon and in conformity with
information furnished in writing to the Company by the Representative on
behalf of any Underwriter specifically for use therein. This indemnity
agreement will be in addition to any liability which the Company may
otherwise have.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act, each director of the Company, and each officer of
the Company who signs the Registration Statement, to the same extent as the
foregoing indemnity from the Company to each Underwriter, but only insofar
as such losses, claims, damages or liabilities arise out of or are based
upon (i) any breach of any representation, warranty, or agreement of the
Underwriter herein contained, or (ii) any untrue statement or omission or
alleged untrue statement or omission which was made in any preliminary
prospectus, the Registration Statement or the Prospectus, or
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any amendment thereof or supplement thereto, contained in the last
paragraph of the Prospectus cover page, in the paragraphs relating to
stabilization and passive market making on the inside front cover page
of the Prospectus and the statements contained under the caption
"Underwriting" in the Prospectus and agrees to reimburse each indemnitee
for any legal or other expenses reasonably incurred by it in connection
with investigating or defending any such loss, claim, damage, or
liabilities; provided, however, that the obligation of each Underwriter to
indemnify the Company (including any controlling person, director or
officer thereof) shall be limited to the net proceeds received by the
Company from such Underwriter.
(c) Any party that proposes to assert the right to be indemnified
under this Section will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a
claim is to be made against an indemnifying party or parties under this
Section, notify each such indemnifying party of the commencement of such
action, suit or proceeding, enclosing a copy of all papers served. No
indemnification provided for in SECTION 7(A) or 7(B) shall be available to
any party who shall fail to give notice as provided in this SECTION 7(C) if
the party to whom notice was not given was unaware of the proceeding to
which such notice would have related and was prejudiced by the failure to
give such notice but the omission so to notify such indemnifying party of
any such action, suit or proceeding shall not relieve it from any liability
that it may have to any indemnified party for contribution or otherwise
than under this Section. In case any such action, suit or proceeding shall
be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate in, and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified
party, and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and the approval by
the indemnified party of such counsel, the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses, except as
provided below and except for the reasonable costs of investigation
subsequently incurred by such indemnified party in connection with the
defense thereof. The indemnified party shall have the right to employ its
counsel in any such action, but the fees and expenses of such counsel shall
be at the expense of such indemnified party unless (i) the employment of
counsel by such indemnified party has been authorized in writing by the
indemnifying parties, (ii) the indemnified party shall have reasonably
concluded that there may be a conflict of interest between the indemnifying
parties and the indemnified party in the conduct of the defense of such
action (in which case the indemnifying parties shall not have the right to
direct the defense of such action on behalf of the indemnified party) or
(iii) the indemnifying parties shall not have employed counsel to assume
the defense of such action within a reasonable time after notice of the
commencement thereof, in each of which cases the fees and expenses of
counsel shall be at the expense of the indemnifying parties. An
indemnifying party shall not be liable for any settlement of any action,
suit, proceeding or claim effected without its written consent.
8. CONTRIBUTION. In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in SECTION 7(A) is
due in accordance with
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its terms but for any reason is held to be unavailable from the Company, the
Company and the Underwriters shall contribute to the aggregate losses,
claims, damages and liabilities (including any investigation, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but
after deducting any contribution received by the Company from persons other
than the Underwriters, such as persons who control the Company within the
meaning of the Securities Act, officers of the Company who signed the
Registration Statement and directors of the Company, who may also be liable
for contribution) to which the Company and one or more of the Underwriters
may be subject in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other from the offering of the Shares or, if such allocation is not permitted
by applicable law or indemnification is not available as a result of the
indemnifying party not having received notice as provided in SECTION 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the statements
or omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Underwriters shall be
deemed to be in the same proportion as (x) the total proceeds from the
offering (net of underwriting discounts but before deducting expenses)
received by the Company, as set forth in the table on the cover page of the
Prospectus, bear to (y) the underwriting discounts received by the
Underwriters, as set forth in the table on the cover page of the Prospectus.
The relative fault of the Company or the Underwriters shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact related to information supplied by the Company
or the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this SECTION 8 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to above. Notwithstanding the
provisions of this SECTION 8, (i) in no case shall any Underwriter (except as
may be provided in the Agreement Among Underwriters) be liable or responsible
for any amount in excess of the underwriting discount applicable to the
Shares purchased by such Underwriter hereunder, and (ii) the Company shall be
liable and responsible for any amount in excess of such underwriting
discount; provided, however, that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this SECTION 8, each person,
if any, who controls an Underwriter within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act shall have the same
rights to contribution as such Underwriter, and each person, if any, who
controls the Company within the meaning of the Section 15 of the Securities
Act or Section 20(a) of the Exchange Act, each officer of the Company who
shall have signed the Registration Statement and each director of the Company
shall have the same rights to contribution as the Company, subject in each
case to clauses (i) and (ii) in the immediately preceding sentence of this
SECTION 8. Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made against
another party or parties under this Section, notify such party or parties
from whom contribution may be sought,
29
<PAGE>
but the omission so to notify such party or parties from whom
contribution may be sought shall not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may have
hereunder or otherwise than under this Section. No party shall be liable for
contribution with respect to any action, suit, proceeding or claim settled
without its written consent. The Underwriter's obligations to contribute
pursuant to this SECTION 8 are several in proportion to their respective
underwriting commitments and not joint.
9. TERMINATION. This Agreement may be terminated with respect to the
Shares to be purchased on a Closing Date by the Representative by notifying the
Company at any time
(a) in the absolute discretion of the Representative at or before any
Closing Date: (i) if the Company shall have failed, refused or been unable
to perform any agreement on its part to be performed, or because any other
condition of the Underwriters' obligations hereunder required to be
fulfilled is not fulfilled, including, without limitation, any change in
the condition (financial or otherwise), earnings, operations, properties,
assets, business or business prospects of the Company from that set forth
in the Registration Statement or Prospectus, which, in your sole judgment,
is material and adverse, (ii) if the Company shall have sustained a
material adverse change in its patent position or patent prospects or a
loss by strike, fire, flood, earthquake, accident or other calamity of such
character as to interfere materially with the conduct of the business and
operations of the Company regardless of whether or not such loss shall have
been insured, (iii) if on or prior to such date, any domestic or
international event or act or occurrence has materially disrupted, or in
the opinion of the Representative will in the future materially disrupt,
the securities markets; (vi) if there has occurred any new outbreak or
material escalation of hostilities or other calamity or crisis the effect
of which on the financial markets of the United States is such as to make
it, in the judgment of the Representative, inadvisable to proceed with the
offering; (v) if there shall be such a material adverse change in general
financial, political or economic conditions or the effect of domestic or
international conditions on the financial markets in the United States is
such as to make it, in the judgment of the Representative, inadvisable or
impracticable to market the Shares; (vi) if additional restrictions not in
force generally on the date hereof shall have been imposed upon trading in
securities generally or trading in the Shares has been suspended by the
Commission or trading generally on the New York Stock Exchange, Inc. or on
the American Stock Exchange, Inc. has been suspended or limited, or minimum
or maximum ranges for prices for securities shall have been fixed, or
maximum ranges for prices for securities have been required, by said
exchanges or by order of the Commission, the National Association of
Securities Dealers, Inc., or any other governmental or regulatory
authority; or (vii) if a banking moratorium has been declared by any state
or federal authority, or
(b) at or before any Closing Date, that any of the conditions
specified in SECTION 5 shall not have been fulfilled when and as required
by this Agreement.
If this Agreement is terminated pursuant to any of its provisions, the
Company shall not be under any liability to any Underwriter, and no Underwriter
shall be under any liability to the Company, except that (y) the Company will
reimburse the Underwriters for all out-of-pocket costs and expenses (including
road show costs, marketing costs, and the reasonable fees and
30
<PAGE>
disbursements of their counsel) incurred by them in connection with the
proposed purchase and sale of the Shares or in contemplation of performing
their obligations hereunder and (z) no Underwriter who shall have failed or
refused to purchase the Shares agreed to be purchased by it under this
Agreement, without some reason sufficient hereunder to justify cancellation
or termination of its obligations under this Agreement, shall be relieved of
liability to the Company or to the other Underwriters for damages occasioned
by its failure or refusal.
10. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters
shall fail (other than for a reason sufficient to justify the cancellation or
termination of this Agreement under SECTION 9) to purchase on any Closing Date
the Shares agreed to be purchased on such Closing Date by such Underwriter or
Underwriters, the Representative may find one or more substitute underwriters to
purchase such Shares or make such other arrangements as the Representative may
deem advisable or one or more of the remaining Underwriters may agree to
purchase such Shares in such proportions as may be approved by the
Representative, in each case upon the terms set forth in this Agreement. If no
such arrangements have been made by the close of business on the business day
following such Closing Date,
(a) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall not exceed 10% of the Shares that
all the Underwriters are obligated to purchase on such Closing Date, then
each of the nondefaulting Underwriters shall be obligated to purchase such
Shares on the terms herein set forth in proportion to their respective
obligations hereunder; provided, that in no event shall the maximum number
of Shares that any Underwriter has agreed to purchase pursuant to SECTION 1
be increased pursuant to this SECTION 10 by more than one-ninth of such
number of Shares without the written consent of such Underwriter, or
(b) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall exceed 10% of the Shares that all
the Underwriters are obligated to purchase on such Closing Date, then the
Company shall be entitled to an additional business day within which it
may, but is not obligated to, find one or more substitute underwriters
reasonably satisfactory to the Representative to purchase such Shares upon
the terms set forth in this Agreement.
In any such case, either the Representative or the Company shall have the
right to postpone the applicable Closing Date for a period of not more than five
business days in order that necessary changes and arrangements (including any
necessary amendments or supplements to the Registration Statement or Prospectus)
may be effected by the Representative and the Company. If the number of Shares
to be purchased on such Closing Date by such defaulting Underwriter or
Underwriters shall exceed 10% of the Shares that all the Underwriters are
obligated to purchase on such Closing Date, and none of the nondefaulting
Underwriters or the Company shall make arrangements pursuant to this Section
within the period stated for the purchase of the Shares that the defaulting
Underwriters agreed to purchase, this Agreement shall terminate with respect to
the Shares to be purchased on such Closing Date without liability on the part of
any nondefaulting Underwriter to the Company and without liability on the part
of the Company, except in both cases as provided in SECTIONS 6(O), 7, 8 and 9.
The provisions of this Section shall not in any way affect the liability of any
defaulting Underwriter to the Company or
31
<PAGE>
the nondefaulting Underwriters arising out of such default. A substitute
underwriter hereunder shall become an Underwriter for all purposes of this
Agreement.
11. MISCELLANEOUS. The respective agreements, representations,
warranties, indemnities and other statements of the Company or its officers and
of the Underwriters set forth in or made pursuant to this Agreement shall remain
in full force and effect, regardless of any investigation made by or on behalf
of any Underwriter or the Company or any of the officers, directors or
controlling persons referred to in SECTIONS 7 and 8 hereof, and shall survive
delivery of and payment for the Shares. The provisions of SECTIONS 6(O), 7, 8
and 9 shall survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the Underwriters and
the Company and their respective successors and assigns, and, to the extent
expressed herein, for the benefit of persons controlling any of the
Underwriters, or the Company, and directors and officers of the Company, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
All notices and communications hereunder shall be in writing and mailed or
delivered or by telephone or telegraph if subsequently confirmed in writing, (a)
if to the Representative, to CIBC Oppenheimer Corp., CIBC Oppenheimer Tower, One
World Financial Center, New York, New York 10281, Attention: General Counsel,
and (b) if to the Company, to its agent for service as such agent's address
appears on the cover page of the Registration Statement.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without regard to principles of conflict of laws.
This Agreement may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
Please confirm that the foregoing correctly sets forth the agreement among
us.
Very truly yours,
PHARMAPRINT INC.
By: _______________________________
Name: _____________________________
Title: ____________________________
Confirmed:
CIBC OPPENHEIMER CORP.
32
<PAGE>
Acting severally on behalf of itself
and as representative of the several
Underwriters named in Schedule I
annexed hereto.
By CIBC OPPENHEIMER CORP.
By: _______________________________
Name: ______________________________
Title: _____________________________
33
<PAGE>
SCHEDULE I
NUMBER OF
NAME FIRM SHARES TO
- ---- BE PURCHASED
--------------
CIBC Oppenheimer Corp.
---------------
Total: ----------
<PAGE>
ANNEX A
The Company agrees to indemnify CIBC Oppenheimer Corp., its employees,
directors, officers, agents, affiliates and each person, if any, who controls it
within the meaning of either Section 20 of the Securities Exchange Act of 1934
or Section 15 of the Securities Act of 1933 (each such person, including CIBC
Oppenheimer Corp., is referred to as "Indemnified Party") from and against any
losses, claims, damages and liabilities, joint or several (including all legal
or other expenses reasonably incurred by any Indemnified Party in connection
with the preparation for or defense of any threatened or pending claim, action
or proceeding, whether or not resulting in any liability) ("Damages"), to which
such Indemnified Party, in connection with its services or arising out of its
engagement hereunder, may become subject under any applicable Federal or state
law or otherwise, including but not limited to liability (i) caused by or
arising out of an untrue statement or an alleged untrue statement of a material
fact or the omission or the alleged omission to state a material fact necessary
in order to make a statement not misleading in light of the circumstances under
which it was made, (ii) caused by or arising out of any act or failure to act or
(iii) arising out of CIBC Oppenheimer Corp.'s engagement or the rendering by any
Indemnified Party of its services under this Agreement; provided, however, that
the Company will not be liable to the Indemnified Party hereunder to the extent
that any Damages are found in a final non-appealable judgment by a court of
competent jurisdiction to have resulted from the gross negligence, bad faith or
willful misconduct of the Indemnified Party seeking indemnification hereunder.
These indemnification provisions shall be in addition to any liability
which the Company may otherwise have to any Indemnified Party.
If for any reason, other than a final non-appealable judgment finding an
Indemnified Party liable for Damages for its gross negligence, bad faith or
willful misconduct the foregoing indemnity is unavailable to an Indemnified
Party or insufficient to hold an Indemnified Party harmless, then the Company
shall contribute to the amount paid or payable by an Indemnified Party as a
result of such Damages in such proportion as is appropriate to reflect not only
the relative benefits received by the Company and its shareholders on the one
hand and CIBC Oppenheimer Corp. on the other, but also the relative fault of the
Company and the Indemnified Party as well as any relevant equitable
considerations, subject to the limitation that in no event shall the total
contribution of all Indemnified Parties to all such Damages exceed the total
amount of fees actually received and retained by CIBC Oppenheimer Corp.
hereunder.
Promptly after receipt by the Indemnified Party of notice of any claim or
of the commencement of any action in respect of which indemnity may be sought,
the Indemnified Party will notify the Company in writing of the receipt or
commencement thereof and the Company shall have the right to assume the defense
of such claim or action (including the employment of counsel reasonably
satisfactory to the Indemnified Party and the payment of fees and expenses of
such counsel), provided that the Indemnified Party shall have the right to
control its defense if, in the opinion of its counsel, the Indemnified Party's
defense is unique or separate to it as the case may be, as opposed to a defense
pertaining to the Company. In any event, the Indemnified Party shall have the
right to retain counsel reasonably satisfactory to the Company, at the Company's
<PAGE>
expense, to represent the Indemnified Party in any claim or action in respect of
which indemnity may be sought and agrees to cooperate with the Company and the
Company's counsel in the defense of such claim or action, it being understood,
however, that the Company shall not, in connection with any one such claim or
action or separate but, substantially similar or related claims or action in the
same jurisdiction arising out of the same general allegations or circumstances,
be liable for the reasonable fees and expenses of more than one separate firm of
attorneys, for all the Indemnified Parties unless the defense of one Indemnified
Party is unique or separate from that of another Indemnified Party subject to
the same claim or action. In the event that the Company does not promptly
assume the defense of a claim or action, the Indemnified Party shall have the
right to employ counsel reasonably satisfactory to the Company, at the Company's
expense, to defend such claim or action. The omission by an Indemnified Party
to promptly notify the Company of the receipt or commencement of any claim or
action in respect of which indemnity may be sought will relieve the Company from
any liability the Company may have to such Indemnified Party only to the extent
that such a delay in notification materially prejudices the Company's defense of
such claim or action. The Company shall not be liable for any settlement of any
such claim or action effected without its written consent, which shall not be
unreasonably withheld or delayed. Any obligation pursuant to this Exhibit I
shall survive the termination or expiration of this Agreement.
2
<PAGE>
Exhibit 4.2
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE,
SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR PURSUANT TO
AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT.
VOID AFTER 5:00 P.M., NEW YORK TIME, ON FEBRUARY
[FIFTH ANNIVERSARY OF CLOSING DATE], 2003 OR IF NOT A BUSINESS DAY, AS
DEFINED HEREIN, AT 5:00 P.M., NEW YORK TIME, ON THE NEXT FOLLOWING BUSINESS
DAY.
WARRANT TO PURCHASE
[ ] SHARES OF COMMON STOCK
OF PHARMAPRINT INC.
NO. 1
TRANSFER RESTRICTED -- SEE SECTION 5.02
This certifies that, for good and valuable consideration, CIBC
Oppenheimer Corp., and its registered, permitted assigns (collectively, the
"WARRANTHOLDER"), is entitled to purchase from PharmaPrint Inc., a Delaware
corporation (the "COMPANY"), subject to the terms and conditions hereof, at
any time on or after 9:00 A.M., New York time, on February
[FIRST ANNIVERSARY OF CLOSING DATE], 1999, and before 5:00 P.M., New York
time, on February [FIFTH ANNIVERSARY OF CLOSING DATE] , 2003 (or, if such day
is not a Business Day, at or before 5:00 P.M., New York time, on the next
following Business Day), the number of fully paid and non-assessable shares
of Common Stock stated above at the Exercise Price. The Exercise Price and
the number of shares purchasable hereunder are subject to adjustment from
time to time as provided in ARTICLE III hereof.
ARTICLE I
1.01: DEFINITION OF TERMS. As used in this Warrant, capitalized
terms shall have the following meanings:
(a) BUSINESS DAY: A day other than a Saturday, Sunday or other day on
which banks in the State of New York or State of California are authorized by
law to remain closed.
(b) COMMON STOCK: Common Stock, $.001 par value per share, of the
Company.
(c) COMMON STOCK EQUIVALENTS: Securities that are convertible into or
exercisable for shares of Common Stock.
(d) DEMAND REGISTRATION: See SECTION 6.02.
(e) EXCHANGE ACT: The Securities Exchange Act of 1934, as amended.
<PAGE>
(f) EXERCISE PRICE: $ per Warrant Share as such price may be
adjusted from time to time pursuant to ARTICLE III.
(g) EXPIRATION DATE: 5:00 P.M., New York time, on February
[FIFTH ANNIVERSARY OF CLOSING DATE], 2003 or if such day is not a Business
Day, the next succeeding day which is a Business Day.
(h) 25% HOLDERS: At any time as to which a Demand Registration is
requested, the Holder and/or the holders of any other Warrants and/or the
holders of Warrant Shares who have the right to acquire or hold, as the case
may be, not less than 25% of the combined total of Warrant Shares issuable
and Warrant Shares outstanding at the time such Demand Registration is
requested.
(i) HOLDER: A Holder of Registrable Securities.
(j) NASD: National Association of Securities Dealers, Inc.
(k) PERSON: An individual, partnership, joint venture, corporation,
trust, unincorporated organization or government or any department or agency
thereof.
(l) PIGGYBACK REGISTRATION: See SECTION 6.01.
(m) PROSPECTUS: Any prospectus included in any Registration Statement,
as amended or supplemented by any prospectus supplement, with respect to the
terms of the offering of any portion of the Registrable Securities covered by
such Registration Statement and all other amendments and supplements to the
Prospectus, including post-effective amendments and all material incorporated
by reference in such Prospectus.
(n) PUBLIC OFFERINGS: A public offering of any of the Company's equity
or debt securities pursuant to a registration statement under the Securities
Act.
(o) REGISTRATION EXPENSES: Any and all expenses incurred in connection
with any registration or action incident to performance of or compliance by
the Company with ARTICLE VI, including, without limitation, (i) all SEC,
national securities exchange and NASD registration and filing fees; all
listing fees and all transfer agent fees; (ii) all fees and expenses of
complying with state securities or blue sky laws (including the fees and
disbursements of counsel for the underwriters in connection with blue sky
qualifications of the Registrable Securities; (iii) all printing, mailing,
messenger and delivery expenses; and (iv) all fees and disbursements of
counsel for the Company and of its accountants, including the expenses of any
special audits and/or "cold comfort " letters required by or incident to such
performance and compliance, but excluding underwriting discounts and
commissions, brokerage fees and transfer taxes, if any, and fees of counsel
or accountants retained by the holders of Registrable Securities to advise
them in their capacity as Holders of Registrable Securities.
(p) REGISTRABLE SECURITIES: Any Warrant Shares and/or other
securities that may be or are issued by the Company upon exercise of
Warrants, including those which may thereafter
<PAGE>
be issued by the Company in respect of any such securities by means of any
stock splits, stock dividends, recapitalizations, reclassifications or the
like, and as adjusted pursuant to ARTICLE III.
(q) REGISTRATION STATEMENT: Any registration statement of the Company
filed or to be filed with the SEC which covers any of the Registrable
Securities pursuant to the provisions of this Agreement, including all
amendments (including post-effective amendments) and supplements thereto, all
exhibits thereto and all material incorporated therein by reference.
(r) SEC: The Securities and Exchange Commission or any other federal
agency at the time administering the Securities Act or the Exchange Act.
(s) SECURITIES ACT: The Securities Act of 1933, as amended.
(t) TRANSFER: See Section 5.02.
(u) WARRANTS: This Warrant, all other warrants issued by the Company
on the date hereof and all other warrants that may be issued in its or their
place (together evidencing the right to purchase an aggregate of 75,000
shares of Common Stock).
(v) WARRANTHOLDER: The person(s) or entity(ies) to whom this Warrant
is originally issued, or any successor in interest thereto, or any assignee
or transferee thereof, in whose name this Warrant is registered upon the
books to be maintained by the Company for that purpose.
(w) WARRANT SHARES: Common Stock, Common Stock Equivalents and other
securities purchased or purchasable upon exercise of the Warrants, until such
securities are sold pursuant to registration under the Securities Act or in
the public markets without registration pursuant to Rule 144 of the SEC under
the Securities Act.
ARTICLE II
DURATION AND EXERCISE OF WARRANT
2.01: DURATION OF WARRANT. Subject to the limitations specified in
SECTION 2.02(a)(ii) regarding a Cashless Exercise, the Warrantholder may
exercise this Warrant at any time and from time to time after 9:00 A.M., New
York time, on February [first anniversary of closing date)____, 1999, and
before 5:00 P.M., New York time, on the Expiration Date. If this Warrant is not
exercised on or prior to the Expiration Date, then, subject to SECTION 2.02(d),
it shall become void and all rights hereunder shall thereupon cease.
2.02: EXERCISE OF WARRANT.
(a) The Warrantholder may exercise this Warrant, in whole or in part
from time to time, as follows:
(i) By presentation and surrender of this Warrant to the Company at
its principal executive offices or at the office of its stock transfer
agent, if any, with the
<PAGE>
Subscription Form annexed hereto duly executed and accompanied by payment
of the full Exercise Price for each Warrant Share to be purchased; or
(ii) By presentation and surrender of this Warrant to the Company at
its principal executive offices with a Cashless Exercise Form annexed
hereto duly executed (a "CASHLESS EXERCISE"). A single exercise may be
effected in part by payment of the Exercise Price and in part by Cashless
Exercise. In the event of a Cashless Exercise, the Warrantholder shall,
in payment of the Exercise Price for the shares for which this Warrant is
being exercised by Cashless Exercise, receive that number of shares of
Common Stock determined by multiplying the number of Warrant Shares for
which this Warrant is being exercised by a fraction, the numerator of which
shall be the amount by which the then current market price per share of
Common Stock exceeds the Exercise Price, and the denominator of which shall
be the then current market price per share of Common Stock. For purposes of
any computation under this SECTION 2.02(a)(ii), the then current market
price per share of Common Stock at any date shall be deemed to be the
average of the last sale price (or, for days upon which no sale took place,
the average of the last reported bid and asked prices of the Common Stock
on such day) of the Common Stock on the ten trading days prior to the date
of the Cashless Exercise, in either case on the principal national
securities exchange or interdealer quotation system on which the Common
Stock is listed or admitted to trading, or if the Common Stock is not so
admitted to trading or listed, the fair market price of the Common Stock as
determined in good faith by the Board of Directors.
(b) Upon receipt of this Warrant, in the case of SECTION 2.02(A)(I),
with the Subscription Form duly executed and accompanied by payment of the
aggregate Exercise Price for the Warrant Shares for which this Warrant is
then being exercised, or, in the case of SECTION 2.02(a)(ii), with the
Cashless Exercise Form duly executed, the Company shall cause to be issued
certificates for the total number of whole shares of Common Stock for which
this Warrant is being exercised (adjusted to reflect the effect of the
anti-dilution provisions contained in ARTICLE III, if any, and as provided in
SECTION 2.04) in such denominations as are requested for delivery to the
Warrantholder, and the Company shall thereupon deliver such certificates to
the Warrantholder. The Warrantholder shall be deemed to be the holder of
record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall
not then be actually delivered to the Warrantholder. If at the time this
Warrant is exercised, a Registration Statement is not in effect to register
under the Securities Act the Warrant Shares issuable upon exercise of this
Warrant, the Company may require the Warrantholder to make such
representations, and may place such legends on certificates representing the
Warrant Shares, as may be reasonably required in the opinion of counsel to
the Company to permit the Warrant Shares to be issued without such
registration.
(c) In case the Warrantholder shall exercise this Warrant with respect to
less than all of the Warrant Shares that may be purchased under this Warrant,
the Company shall execute a new warrant in the form of this Warrant for the
balance of such Warrant Shares and deliver such new warrant to the
Warrantholder.
<PAGE>
(d) Notwithstanding the foregoing, if at 5:00 P.M., New York time, on
the Expiration Date the Warrantholder has not exercised its Warrants and has
not notified the Company that it waives automatic issuance pursuant to this
SECTION 2.02(d), then all such unexercised Warrants shall be automatically
converted into that number, if any, of shares of Common Stock or other
securities then issuable upon exercise of this Warrant of the Company equal
to the amount of shares of Common Stock or such other securities the
Warrantholder would have received if it had completed a Cashless Exercise as
defined in SECTION 2.02(a)(ii) immediately prior to 5:00 P.M. New York time
on the Expiration Date.
(e) The Company shall pay any and all stock transfer and similar taxes
which may be payable in respect of the issue of this Warrant or in respect of
the issue of any Warrant Shares.
2.03: RESERVATION OF SHARES. The Company hereby agrees that at all
times there shall be reserved for issuance and delivery upon exercise of this
Warrant such number of shares of Common Stock or other shares of capital
stock of the Company from time to time issuable upon exercise of this
Warrant. All such shares shall be duly authorized, and when issued upon such
exercise, shall be validly issued, fully paid and nonassessable, free and
clear of all liens, security interests, charges and other encumbrances or
restrictions on sale and free and clear of all preemptive rights (except the
restrictions imposed by the legend appearing at the top of Page 1 of this
Warrant).
2.04: FRACTIONAL SHARES. The Company shall not be required to
issue any fraction of a share of its capital stock in connection with the
exercise of this Warrant, and in any case where the Warrantholder would,
except for the provisions of this SECTION 2.04, be entitled under the terms
of this Warrant to receive a fraction of a share upon the exercise of this
Warrant, the Company shall, upon the exercise of this Warrant and tender of
the Exercise Price (as adjusted to cover the balance of the share), issue the
larger number of whole shares purchasable upon exercise of this Warrant. The
Company shall not be required to make any cash or other adjustment in respect
of such fraction of a share to which the Warrantholder would otherwise be
entitled.
2.05: LISTING. Prior to the issuance of any shares of Common Stock
upon exercise of this Warrant, the Company shall secure the listing and
admission to trading of such shares of Common Stock upon each national
securities exchange and interdealer quotation system, if any, upon which
shares of Common Stock are then listed or admitted to trading (subject to
official notice of issuance upon exercise of this Warrant) and shall
maintain, so long as any other shares of Common Stock shall so be listed or
admitted, such listing and admission of all shares of Common Stock from time
to time issuable upon the exercise of this Warrant; and the Company shall
cause the listing and admission to trading on each national securities
exchange and interdealer quotation system, and shall maintain such listing
and admission of, any other shares of capital stock of the Company issuable
upon the exercise of this Warrant if and so long as any shares of the same
class shall be listed or admitted on such national securities exchange or
interdealer quotation system.
<PAGE>
ARTICLE III
ADJUSTMENT OF SHARES OF COMMON STOCK
PURCHASABLE AND OF EXERCISE PRICE
The Exercise Price and the number and kind of Warrant Shares shall be
subject to adjustment from time to time upon the happening of certain events
as provided in this Article III.
3.01: MECHANICAL ADJUSTMENTS.
(a) If at any time prior to the exercise of this Warrant in full, the
Company shall (i) declare a dividend or make a distribution on the Common
Stock payable in shares of its capital stock (whether shares of Common Stock
or of capital stock of any other class); (ii) subdivide, reclassify or
recapitalize outstanding Common Stock into a greater number of shares; (iii)
combine, reclassify or recapitalize its outstanding Common Stock into a
smaller number of shares; or (iv) issue any shares of its capital stock by
reclassification of its Common Stock (including any such reclassification in
connection with a consolidation or a merger in which the Company is the
continuing corporation), the Exercise Price in effect at the time of the
record date of such dividend, distribution, subdivision, combination,
reclassification or recapitalization shall be adjusted so that the
Warrantholder shall be entitled to receive the aggregate number and kind of
shares which, if this Warrant had been exercised in full with respect to all
Warrant Shares then remaining subject to this Warrant immediately prior to
such event, he would have owned upon such exercise and been entitled to
receive by virtue of such dividend, distribution, subdivision, combination,
reclassification or recapitalization. Any adjustment required by this SECTION
3.01(a) shall be made successively immediately after the record date, in the
case of a dividend or distribution, or the effective date, in the case of a
subdivision, combination, reclassification or recapitalization to allow the
purchase of such aggregate number and kind of shares.
(b) If at any time after the date of this Warrant and prior to the
exercise of this Warrant in full, the Company shall fix a record date for the
issuance of subscription rights, options or warrants to all holders of Common
Stock entitling them to subscribe for or purchase Common Stock (or Common
Stock Equivalents) at a price (or having an exercise or conversion price per
share) less than the current market price of the Common Stock (as determined
pursuant to SECTION 3.01 (f)) on the record date described below, the
Exercise Price shall be adjusted so that the Exercise Price shall equal the
price determined by multiplying the Exercise Price in effect immediately
prior to the date of such sale or issuance (which date in the event of
distribution to shareholders shall be deemed to be the record date set by the
Company to determine shareholders entitled to participate in such
distribution) by a fraction, the numerator of which shall be (i) the number
of shares of Common Stock outstanding on the date of such sale or issuance,
plus (ii) the number of additional shares of Common Stock which the aggregate
consideration received by the Company upon such issuance or sale (plus the
aggregate of any additional amount to be received by the Company upon the
exercise of such subscription rights, options or warrants) would purchase at
such current market price per share of the Common Stock; and the denominator
of which shall be (i) the number of shares of Common Stock outstanding on the
date of such issuance or sale, plus (ii) the number of additional shares of
Common Stock offered for subscription or purchase (or into which the Common
Stock Equivalents so offered are exercisable
<PAGE>
or convertible). Any adjustments required by this SECTION 3.01(b) shall be
made immediately after such issuance or sale or record date, as the case may
be. Such adjustments shall be made successively whenever such event shall
occur. To the extent that shares of Common Stock (or Common Stock
Equivalents) are not delivered in connection with such subscription rights,
options or warrants, the Exercise Price shall be readjusted to the Exercise
Price which would then be in effect had the adjustments made upon the
issuance of such rights, options or warrants been made upon the basis of
delivery of only the number of shares of Common Stock (or Common Stock
Equivalents) actually delivered.
(c) If at any time prior to the exercise of this Warrant in full, the
Company shall fix a record date for the issuance or making a distribution to
all holders of Common Stock (including any such distribution to be made in
connection with a consolidation or merger in which the Company is to be the
continuing corporation) of evidences of its indebtedness, any other
securities of the Company or any cash, property or other assets (excluding a
combination, reclassification or recapitalization referred to in SECTION
3.01(a), regular cash dividends or cash distributions paid out of net profits
legally available therefor and in the ordinary course of business and
subscription rights, options or warrants for Common Stock or Common Stock
Equivalents (excluding those referred to in Section 3.01 (b)) (any such
nonexcluded event being herein called a "SPECIAL DIVIDEND"), the Exercise
Price shall be decreased immediately after the record date for such Special
Dividend to a price determined by multiplying the Exercise Price then in
effect by a fraction, the numerator of which shall be the then current market
price of the Common Stock (as defined in SECTION 3.01(f)) on such record date
less the fair market value (as determined in good faith by the Company's
Board of Directors) of the evidences of indebtedness, securities or property,
or other assets issued or distributed in such Special Dividend applicable to
one share of Common Stock or of such subscription rights, options or warrants
applicable to one share of Common Stock and the denominator of which shall be
such then current market price per share of Common Stock (as so determined).
Any adjustment required by this SECTION 3.01(c) shall be made successively
whenever such a record date is fixed and in the event that such distribution
is not so made, the Exercise Price shall again be adjusted to be the Exercise
Price that was in effect immediately prior to such record date.
(d) If at any time prior to the exercise of this Warrant in full, the
Company shall make a distribution to all holders of the Common Stock of stock
of a subsidiary or securities convertible into or exercisable for such stock,
then in lieu of an adjustment in the Exercise Price or the number of Warrant
Shares purchasable upon the exercise of this warrant, each Warrantholder,
upon the exercise hereof at any time after such distribution, shall be
entitled to receive from the Company, such subsidiary or both, as the Company
shall determine, the stock or other securities to which such Warrantholder
would have been entitled if such Warrantholder had exercised this Warrant
immediately prior thereto, all subject to further adjustment as provided in
this ARTICLE III, and the Company shall reserve, for the life of the Warrant,
such securities of such subsidiary or other corporation.
(e) Whenever the Exercise Price payable upon exercise of each Warrant
is adjusted pursuant to one or more of paragraphs (a), (b) and (c) of this
SECTION 3.01, the Warrant Shares shall simultaneously be adjusted by
multiplying the number of Warrant Shares issuable immediately prior to such
adjustment upon exercise of each Warrant by the Exercise Price in
<PAGE>
effect immediately prior to such adjustment and dividing the product so
obtained by the Exercise Price, as adjusted.
(f) For the purpose of any computation under this SECTION 3.01, the
current market price per share of Common Stock at any date shall be deemed to
be the average of the daily closing prices for 20 consecutive trading days
commencing 30 trading days before such date. The closing price for each day
shall be the last sale price regular way or, in case no such reported sales
take place on such day, the average of the last reported bid and asked prices
regular way, in either case on the principal national securities exchange or
interdealer quotation system on which the Common Stock is listed or admitted
to trading, or if the Common Stock is not so listed or admitted to trading,
the fair market price as determined in good faith by the Board of Directors
of the Company.
(g) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least ten cents ($.10)
in such price; PROVIDED, HOWEVER, that any adjustments which by reason of
this paragraph (g) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
SECTION 3.01 shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be. Notwithstanding anything in
this Section 3.01 to the contrary, the Exercise Price shall not be reduced to
less than the then existing par value of the Common Stock as a result of any
adjustment made hereunder.
(h) In the event that at any time, as a result of any adjustment made
pursuant to SECTION 3.01(a), the Warrantholder thereafter shall become
entitled to receive any securities other than or in addition to Common Stock,
thereafter the number of such other shares so receivable upon exercise of any
Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to
the Common Stock contained in SECTION 3.01(a).
(i) In the case of an issue of additional Common Stock or Common Stock
Equivalents for cash, the consideration received by the Company therefor,
after deducting therefrom any discount or commission or other expenses paid
by the Company for any underwriting of, or otherwise in connection with, the
issuance thereof, shall be deemed to be the amount received by the Company
therefor. The term "issue" shall include the sale or other disposition of
shares held by or on account of the Company or in the treasury of the Company
but until so sold or otherwise disposed of such shares shall not be deemed
outstanding.
3.02: NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares or
the Exercise Price is adjusted as herein provided, the Company shall prepare
and deliver forthwith to the Warrantholder a certificate signed by its Chief
Executive Officer or President, and by any Vice President, Treasurer or
Secretary, setting forth the adjusted number of shares purchasable upon the
exercise of this Warrant and the Exercise Price of such shares after such
adjustment, a brief statement of the facts requiring such adjustment and the
computation by which adjustment was made.
<PAGE>
3.03: NO ADJUSTMENT FOR DIVIDENDS. Except as provided in SECTION
3.01, no adjustment in respect of any cash dividends paid by the Company
shall be made during the term of this Warrant or upon the exercise of this
Warrant.
3.04: PRESERVATION OF PURCHASE RIGHTS IN CERTAIN TRANSACTIONS. In
case of any reclassification, capital reorganization or other change of
outstanding shares of Common Stock (other than a subdivision or a combination
of the outstanding Common Stock and other than a change in the par value of
the Common Stock) or in case of any consolidation or merger of the Company
with or into another corporation (other than a merger with a subsidiary in
which the Company is the continuing corporation and said merger does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of
this Warrant)) or in case of any sale, lease, transfer or conveyance to
another corporation of the property and assets of the Company as an entirety
or substantially as an entirety, the Company shall, as a condition precedent
to such transaction, cause such successor or purchasing corporation, as the
case may be, to execute with the Warrantholder an agreement granting the
Warrantholder the right thereafter, upon payment of the Exercise Price in
effect immediately prior to such action, to receive upon exercise of this
Warrant the kind and amount of shares and other securities and property which
he would have owned or have been entitled to receive after the happening of
such reclassification, change, consolidation, merger, sale or conveyance had
this Warrant been exercised immediately prior to such action. Such agreement
shall provide for adjustments in respect of such shares of stock and other
securities and property, which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this ARTICLE III. In the
event that in connection with any such reclassification, capital
reorganization, change, consolidation, merger, sale or conveyance, additional
shares of Common Stock shall be issued in exchange, conversion, substitution
or payment, in whole or in part, for, or of, a security of the Company other
than Common Stock, any such issue shall be treated as an issue of Common
Stock covered by the provisions of ARTICLE III. The provisions of this
SECTION 3.04 shall similarly apply to successive reclassification, capital
reorganizations, consolidations, mergers, sales or conveyances.
3.05: FORM OF WARRANT AFTER ADJUSTMENTS. The form of this Warrant
need not be changed because of any adjustments in the Exercise Price or the
number or kind of the Warrant Shares, and Warrants theretofore or thereafter
issued may continue to express the same price and number and kind of shares
as are stated in this Warrant, as initially issued.
3.06: TREATMENT OF WARRANTHOLDER. Prior to due presentment for
registration of transfer of this Warrant, the Company may deem and treat the
Warrantholder as the absolute owner of this Warrant (notwithstanding any
notation of ownership or other writing hereon) for all purposes and shall not
be affected by any notice to the contrary.
<PAGE>
ARTICLE IV
OTHER PROVISIONS RELATING
TO RIGHTS OF WARRANTHOLDER
4.01: NO RIGHTS AS SHAREHOLDERS: NOTICE TO WARRANTHOLDERS. Nothing
contained in this Warrant shall be construed as conferring upon the
Warrantholder or his or its transferees the right to vote or to receive
dividends or to consent to or receive notice as a shareholder in respect of
any meeting of shareholders for the election of directors of the Company or
any other matter, or any other rights whatsoever as shareholders of the
Company. The Company shall give notice to the Warrantholder by registered
mail if at any time prior to the expiration or exercise in full of the
Warrants, any of the following events shall occur:
(a) the Company shall authorize the payment of any dividend upon shares
of Common Stock payable in any securities or authorize the making of any
distribution (other than a cash dividend subject to the parenthetical set
forth in SECTION 3.01(c)) to all holders of Common Stock;
(b) the Company shall authorize the issuance to all holders of Common
Stock of any additional shares of Common Stock or Common Stock Equivalents or
of rights, options or warrants to subscribe for or purchase Common Stock or
Common Stock Equivalents or of any other subscription rights, options or
warrants;
(c) a dissolution, liquidation or winding up of the Company (other than
in connection with a consolidation, merger, or sale or conveyance of the
property of the Company as an entirety or substantially as an entirety); or
(d) a capital reorganization or reclassification of the Common Stock
(other than a subdivision or combination of the outstanding Common Stock and
other than a change in the par value of the Common Stock) or any
consolidation or merger of the Company with or into another corporation
(other than a consolidation or merger in which the Company is the continuing
corporation and that does not result in any reclassification or change of
Common Stock outstanding) or in the case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as
an entirety.
Such giving of notice shall be initiated at least ten Business Days
prior to the date fixed as a record date or effective date or the date of
closing of the Company's stock transfer books for the determination of the
shareholders entitled to such dividend, distribution or subscription rights,
or for the determination of the shareholders entitled to vote on such
proposed merger, consolidation, sale, conveyance, dissolution, liquidation or
winding up. Such notice shall specify such record date or the date of closing
the stock transfer books, as the case may be. Failure to provide such notice
shall not affect the validity of any action taken in connection with such
dividend, distribution or subscription rights, or proposed merger,
consolidation, sale, conveyance, dissolution, liquidation or winding up.
4.02: LOST STOLEN MUTILATED OR DESTROYED WARRANTS. If this Warrant
is lost, stolen, mutilated or destroyed, the Company may, on such terms as to
indemnity or otherwise as it may in
<PAGE>
its discretion impose (which shall, in the case of a mutilated Warrant,
include the surrender thereof), issue a new Warrant of like denomination and
tenor as and in substitution for this Warrant.
ARTICLE V
SPLIT-UP, COMBINATION
EXCHANGE AND TRANSFER OF WARRANTS
5.01: SPLIT-UP. COMBINATION. EXCHANGE AND TRANSFER OF WARRANTS.
Subject to the provisions of SECTION 5.02, this Warrant may be split up,
combined or exchanged for another Warrant or Warrants containing the same
terms to purchase a like aggregate number of Warrant Shares. If the
Warrantholder desires to split up, combine or exchange Warrants, he or it
shall make such request in writing delivered to the Company and shall
surrender to the Company any Warrants to be so split up, combined or
exchanged. Upon any such surrender for a split up, combination or exchange,
the Company shall execute and deliver to the person entitled thereto a
Warrant or Warrants, as the case may be, as so requested. The Company shall
not be required to effect any split up, combination or exchange which will
result in the issuance of a Warrant entitling the Warrantholder to purchase
upon exercise a fraction of a share of Common Stock or a fractional Warrant.
The Company may require such Warrantholder to pay a sum sufficient to cover
any tax or governmental charge that may be imposed in connection with any
split up, combination or exchange of Warrants.
5.02: RESTRICTIONS ON TRANSFER. Neither this Warrant nor the Warrant
Shares may be disposed of or encumbered prior to February __, 1999 (FIRST
ANNIVERSARY OF EFFECTIVE DATE) (any such action, a "TRANSFER"), except (i) to
CIBC Oppenheimer Corp., any successor to the business of such company, or any
officer or partner of such company, or (ii) as otherwise permitted under the
NASD's underwriter compensation rules. All transfers of this Warrant and
Warrant Shares will be made in such a manner as not to violate the Securities
Act and the rules and regulations promulgated thereunder. If at the time of a
Transfer, a Registration Statement is not in effect to register this Warrant
or the Warrant Shares, the Company may require the Warrantholder to make such
representations, and may place such legends on certificates representing this
Warrant, as may be reasonably required in the opinion of counsel to the
Company to permit a Transfer without such registration.
ARTICLE VI
REGISTRATION UNDER THE SECURITIES ACT OF 1933
6.01: PIGGYBACK REGISTRATION.
(a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. If at any time or from
time to time after the date of this Warrant and prior to the Expiration Date,
the Company proposes to register any of its securities under the Securities
Act on any form for the registration of securities under such Act, whether or
not for its own account (other than by a registration statement on Form S-8
or Form S-4) (a "PIGGYBACK REGISTRATION"), it shall as expeditiously as
possible give written notice
<PAGE>
to all Holders of its intention to do so which notice will refer to but need
not describe such Holders' rights under this SECTION 6.01. Such rights are
referred to hereinafter as "PIGGYBACK REGISTRATION RIGHTS." Upon the written
request of any such Holder made within 20 days after receipt of any such
notice (which request shall specify the Registrable Securities intended to be
disposed of by such Holder), the Company shall include in the Registration
Statement the Registrable Securities which the Company has been so requested
to register by the Holders thereof and the Company shall keep such
registration statement in effect and maintain compliance with each Federal
and state law or regulation for the period necessary for such Holder to
effect the proposed sale or other disposition (but in no event for a period
greater than 120 days).
(b) WITHDRAWAL OF PIGGYBACK REGISTRATION BY COMPANY. If, at any time
after giving written notice of its intention to register any securities in a
Piggyback Registration but prior to the effective date of the related
Registration Statement, the Company shall determine for any reason not to
register such securities, the Company shall give written notice of such
determination to each Holder and, thereupon, shall be relieved of its
obligation to register any Registrable Securities in connection with such
Piggyback Registration. All best efforts obligations of the Company pursuant
to SECTION 6.04 shall cease if the Company determines to terminate prior to
such effective date any registration where Registrable Securities are being
registered pursuant to this SECTION 6.01.
(c) PIGGYBACK REGISTRATION OF UNDERWRITTEN PUBLIC OFFERINGS. If a
Piggyback Registration involves an offering by or through underwriters, then,
(i) all Holders requesting to have their Registrable Securities included in
the Company's Registration Statement must sell their Registrable Securities
to the underwriters selected by the Company on the same terms and conditions
as apply to other selling shareholders and (ii) any Holder requesting to have
his or its Registrable Securities included in such Registration Statement may
elect in writing, not later than three Business Days prior to the
effectiveness of the Registration Statement filed in connection with such
registration, not to have his or its Registrable Securities so included in
connection with such registration.
(d) PAYMENT OF REGISTRATION EXPENSES FOR PIGGYBACK REGISTRATION. The
Company shall pay all Registration Expenses in connection with each
registration of Registrable Securities requested pursuant to a Piggyback
Registration Right contained in this SECTION 6.01.
(e) PRIORITY IN PIGGYBACK REGISTRATION. If a Piggyback Registration
involves an offering by or through underwriters, the Company shall not be
required to include Registrable Shares therein if and to the extent the
underwriter managing the offering reasonably believes in good faith and
advises each Holder requesting to have Registrable Securities included in the
Company's Registration Statement that such inclusion would materially
adversely affect such offering; provided that (i) if other selling
shareholders who are employees, officers, directors or other affiliates of
the Company have requested registration of securities in the proposed
offering, the Company will reduce or eliminate such other selling
shareholders' securities before any reduction or elimination of Registrable
Securities; (ii) any such reduction or elimination (after taking into account
the effect of clause (i)) shall be PRO RATA to all other holders of the
securities of the Company exercising "piggyback registration rights" similar
to those set forth herein in proportion to the respective number of shares
they have requested to be registered, other than those rights
<PAGE>
outstanding as of the date hereof which by their terms as of the date hereof
have priority, and (iii) in such event, such Holders may delay any offering
by them of all Registrable Shares requested to be included (or that portion
of such Registrable Shares eliminated for such period, not to exceed 60 days,
as the managing underwriter shall request) and the Company shall file such
supplements and post-effective amendments or additional registration
statements and take such other action necessary under Federal and state law
or regulation as may be necessary to permit such Holders to make their
proposed offering for a period of 90 days following such period of delay.
6.02: DEMAND REGISTRATION.
(a) REQUEST FOR REGISTRATION. If, at any time after the date of this
Warrant and prior to the Expiration Date, any 25% Holders request that the
Company file a registration statement under the Securities Act, the Company
will promptly inform all Holders of such registration and as soon as
practicable shall use its best efforts to file a registration statement with
respect to all Warrant Shares that it has been so requested to include and
obtain the effectiveness thereof, and to take all other action necessary
under any Federal or state law or regulation to permit the Warrant Shares
that are then held and/or that may be acquired upon the exercise of the
Warrants specified in the notices of the Holders or holders thereof to be
sold or otherwise disposed of, and the Company shall maintain such compliance
with each such Federal and state law and regulation for the period necessary
for such Holders or holders to effect the proposed sale or other disposition
(but in no event for more than 120 days); PROVIDED, HOWEVER, the Company
shall be entitled to defer such registration for a period of up to 60 days if
and to the extent that its Board of Directors shall determine in good faith
that such registration would interfere with a pending corporate transaction.
The Company shall also promptly give written notice to the Holder and the
holders of any other Warrants and/or the holders of any Warrant Shares who or
that have not made a request to the Company pursuant to the provisions of
this subsection (a) of its intention to effect any required registration or
qualification and shall use its best efforts to effect as expeditiously as
possible such registration or qualification of all other such Warrant Shares
that are then held and/or that may be acquired upon the exercise of the
Warrants, the Holder or holders of which have requested such registration or
qualification, within 15 days after such notice has been given by the
Company, as provided in the preceding sentence. The Company shall be required
to effect a registration or qualification pursuant to this subsection (a) on
one occasion only.
(b) PAYMENT OF REGISTRATION EXPENSES FOR DEMAND REGISTRATION. The
Company shall pay all Registration Expenses in connection with the Demand
Registration.
(c) SELECTION OF UNDERWRITERS. If any Demand Registration is requested
to be in the form of an underwritten offering, the managing underwriter shall
be CIBC Oppenheimer Corp. and the co-manager (if any) and the independent
pricer required under the rules of the NASD (if any) shall be selected and
obtained by the Holders of a majority of the Warrant Shares to be registered.
Such selection shall be subject to the Company's consent, which consent shall
not be unreasonably withheld. All fees and expenses (other than Registration
Expenses otherwise required to be paid) of any managing underwriter, any
co-manager or any independent underwriter or other independent pricer
required under the rules of the NASD shall be paid for by such underwriters
or by the Holders or holders whose shares are being registered. If CIBC
<PAGE>
Oppenheimer Corp. should decline to serve as managing underwriter, the
Holders of a majority of the Warrant Shares to be registered may select and
obtain one or more managing underwriters. Such selection shall be subject to
the Company's consent, which consent shall not be unreasonably withheld.
6.03: BUY-OUTS OF REGISTRATION DEMAND. In lieu of carrying out its
obligations to effect a Piggyback Registration or Demand Registration of any
Registrable Securities pursuant to this ARTICLE VI, the Company may carry out
such obligation by offering to purchase and purchasing such Registrable
Securities requested to be registered at an amount in cash equal to the
difference between (a) the average of the last sales price (or, for days upon
which no sale took the place, the average of the last reported bid and asked
prices of the Common Stock on such day) of the Common Stock on the ten
trading days immediately preceding the request for registration is made and
(b) the Exercise Price in effect on such day.
6.04: REGISTRATION PROCEDURES. If and whenever the Company is
required to use its best efforts to take action pursuant to any Federal or
state law or regulation to permit the sale or other disposition of any
Warrant Shares that are then held or that may be acquired upon exercise of
the Warrants, in order to effect or cause the registration of any Registrable
Securities under the Securities Act as provided in this ARTICLE VI, the
Company shall, as expeditiously as practicable:
(a) furnish to each selling Holder of Registrable Securities and the
underwriters, if any, without charge, as many copies of the Registration
Statement, the Prospectus or the Prospectuses (including each preliminary
prospectus) and any amendment or supplement thereto as they may reasonably
request;
(b) enter into such agreements (including an underwriting agreement)
and take all such other actions reasonably required in connection therewith
in order to expedite or facilitate the disposition of such Registrable
Securities and in such connection, if the registration is in connection with
an underwritten offering (i) make such representations and warranties to the
underwriters in such form, substance and scope as are customarily made by
issuers to underwriters in underwritten offerings and confirm the same if and
when requested; (ii) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions in form, scope and substance shall be
reasonably satisfactory to the underwriters) addressed to the underwriters
and the Holders covering the matters customarily covered in opinions
requested in underwritten offerings and such other matters as may be
reasonably requested by such underwriters; (iii) obtain "cold comfort"
letters and updates thereof from the Company's accountants addressed to the
underwriters, such letters to be in customary form and to cover matters of
the type customarily covered in "cold comfort " letters to underwriters and
the Holders in connection with underwritten offerings; (iv) set forth in
full, in any underwriting agreement entered into, the indemnification
provisions and procedures of SECTION 6.05 hereof with respect to all parties
to be indemnified pursuant to said Section; and (v) deliver such documents
and certificates as may be reasonably requested by the underwriters to
evidence compliance with clause (i) above and with any customary conditions
contained in the underwriting agreement or other agreement entered into by
the Company; the above shall be done at each closing under such underwriting
or similar agreement or as and to the extent required thereunder;
<PAGE>
(c) make available for inspection by one or more representatives of the
Holders of Registrable Securities being sold, any underwriter participating
in any disposition pursuant to such registration, and any attorney or
accountant retained by such Holders or underwriter, all financial and other
records, pertinent corporate documents and properties of the Company, and
cause the Company's officers, directors and employees to supply all
information reasonably requested by any such representatives in connection
with such;
(d) otherwise use its best efforts to comply with all applicable
Federal and state regulations; and take such other action as may be
reasonably necessary or advisable to enable each such Holder and each such
underwriter to consummate the sale or disposition in such jurisdiction or
jurisdiction, in which any such Holder or underwriter shall have requested
that the Registrable Securities be sold.
Except as otherwise provided in this Agreement, the Company shall have
sole control in connection with the preparation, filing, withdrawal,
amendment or supplementing of each Registration Statement, the selection of
underwriters, and the distribution of any preliminary prospectus included in
the Registration Statement, and may include within the coverage thereof
additional shares of Common Stock or other securities for its own account or
for the account of one or more of its other security holders.
Each seller of Registrable Securities as to which any registration is
being effected shall furnish to the Company such information regarding the
distribution of such securities and such other information as may otherwise
be required by the Securities Act to be included in such Registration
Statement.
6.05: INDEMNIFICATION.
(a) INDEMNIFICATION BY COMPANY. In connection with each Registration
Statement relating to disposition of Registrable Securities, the Company
shall indemnify and hold harmless each Holder and each underwriter of
Registrable Securities and each Person, if any, who controls such Holder or
underwriter (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) against any and all losses, claims, damages
and liabilities, joint or several (including any reasonable investigation,
legal and other expenses incurred in connection with, and any amount paid in
settlement of any action, suit or proceeding or any claim asserted), to which
they, or any of them, may become subject under the Securities Act, the
Exchange Act or other Federal or state law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement, Prospectus or
preliminary prospectus or any amendment thereof or supplement thereto, or
arise out of or are based upon any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; PROVIDED, HOWEVER, that such indemnity
shall not inure to the benefit of any Holder or underwriter (or any Person
controlling such Holder or underwriter within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act) on account of any
losses, claims, damages or liabilities arising from the sale of Registrable
Securities if such untrue statement or omission or alleged untrue statement
or omission was made in such Registration Statement, Prospectus or
preliminary prospectus, or such
<PAGE>
amendment or supplement, in reliance upon and in conformity with information
furnished in writing to the Company by the Holder or underwriter specifically
for use therein. The Company shall also indemnify selling brokers, dealer
managers and similar securities industry professionals participating in the
distribution, their officers and directors and each Person who controls such
Persons (within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act) to the same extent as provided above with respect to the
indemnification of the Holders of Registrable Securities, if requested. This
indemnity agreement shall be in addition to any liability which the Company
may otherwise have.
(b) INDEMNIFICATION BY HOLDER. In connection with each Registration
Statement, each Holder shall indemnify, to the same extent as the
indemnification provided by the Company in SECTION 6.05(a), the Company, its
directors and each officer who signs the Registration Statement and each
Person who controls the Company (within the meaning of Section 15 of the
Securities Act and Section 20 of the Exchange Act) but only insofar as such
losses, claims, damages and liabilities arise out of or are based upon any
untrue statement or omission or alleged untrue statement or omission which
was made in the Registration Statement, the Prospectus or preliminary
prospectus or any amendment thereof or supplement thereto, in reliance upon
and in conformity with information furnished in writing by such Holder to the
Company specifically for use therein. In no event shall the liability of any
selling Holder of Registrable Securities hereunder be greater in amount than
the dollar amount of the net proceeds received by such Holder upon the sale
of the Registrable Securities giving rise to such indemnification obligation.
The Company shall be entitled to receive indemnities from underwriters,
selling brokers, dealer managers and similar securities industry
professionals participating in the distribution, to the same extent as
provided above, with respect to information so furnished in writing by such
Persons specifically for inclusion in any Prospectus, Registration Statement
or preliminary prospectus or any amendment thereof or supplement thereto.
(c) CONDUCT OF INDEMNIFICATION PROCEDURE. Any party that proposes to
assert the right to be indemnified hereunder will, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party
in respect of which a claim is to be made against an indemnifying party or
parties under this Section, notify each such indemnifying party of the
commencement of such action, suit or proceeding, enclosing a copy of all
papers served. No indemnification provided for in SECTION 6.05(a) or 6.05(b)
shall be available to any party who shall fail to give notice as provided in
this SECTION 6.05(c) if the party to whom notice was not given was unaware of
the proceeding to which such notice would have related and was prejudiced by
the failure to give such notice, but the omission so to notify such
indemnifying party of any such action, suit or proceeding shall not relieve
it from any liability that it may have to any indemnified party for
contribution or otherwise than under this Section. In case any such action,
suit or proceeding shall be brought against any indemnified party and it
shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in, and, to the extent
that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and the
approval by the indemnifying party to such indemnified party of its election
so to assume the defense thereof and the approval by the indemnified party of
such counsel, the indemnifying party shall not be liable to such indemnified
party for any legal or other expenses,
<PAGE>
except as provided below and except for the reasonable costs of investigation
subsequently incurred by such indemnified party in connection with the
defense thereof. The indemnified party shall have the right to employ its
counsel in any such action, but the fees and expenses of such counsel shall
be at the expense of such indemnified party unless (i) the employment of
counsel by such indemnified party has been authorized in writing by the
indemnifying parties, (ii) the indemnified party shall have reasonably
concluded that there may be a conflict of interest between the indemnifying
parties and the indemnified party in the conduct of the defense of such
action (in which case the indemnifying parties shall not have the right to
direct the defense of such action on behalf of the indemnified party) or
(iii) the indemnifying parties shall not have employed counsel to assume the
defense of such action within a reasonable time after notice of the
commencement thereof, in each of which cases the fees and expenses of counsel
shall be at the expense of the indemnifying parties. An indemnifying party
shall not be liable for any settlement of any action, suit, proceeding or
claim effected without its written consent.
(d) CONTRIBUTION. In connection with each Registration Statement
relating to the disposition of Registrable Securities, if the indemnification
provided for in subsection (a) hereof is unavailable to an indemnified party
thereunder in respect of any losses, claims, damages or liabilities referred
to therein, then the Company shall, in lieu of indemnifying such indemnified
party, contribute to the amount paid or payable by such indemnified party as
a result of such losses, claims, damages or liabilities. The amount to be
contributed by the Company hereunder shall be an amount which is in the same
proportionate relationship to the total amount of such losses, claims,
damages or liabilities as the total net proceeds from the offering (before
deducting expenses) of the Registrable Securities bears to the total price to
the public (including underwriters' discounts) for the offering of the
Registrable Securities covered by such registration.
(e) SPECIFIC PERFORMANCE. The Company and the Holder acknowledge that
remedies at law for the enforcement of this SECTION 6.05 may be inadequate
and intend that this Section 6.05 shall be specifically enforceable.
ARTICLE VII
OTHER MATTERS
7.01: AMENDMENTS AND WAIVERS. The provisions of this Warrant,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waiver or consents to departures from the provisions hereof
may not be given unless the Company has obtained the written consent of
holders of at least a majority of the outstanding Registrable Securities.
Holders shall be bound by any consent authorized by this Section whether or
not certificates representing such Registrable Securities have been marked to
indicate such consent.
7.02: COUNTERPARTS. This Warrant may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of
which so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
7.03: GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of New York.
<PAGE>
7.04: SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances,
is held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provisions in every other respect and of the
remaining provisions contained herein shall not be affected or impaired
thereby.
7.05: ATTORNEYS' FEES. In any action or proceeding brought to enforce
any provisions of this Warrant, or where any provisions hereof or thereof is
validly asserted as a defense, the successful party shall be entitled to
recover reasonable attorneys' fees and disbursements in addition to its costs
and expenses and any other available remedy.
7.06: COMPUTATIONS OF CONSENT. Whenever the consent or approval of
Holders of a specified percentage of Registrable Securities is required
hereunder, Registrable Securities held by the Company or its affiliates
(other than the Warrantholder or subsequent Holders if they are deemed to be
such affiliates solely by reason of their holdings of such Registrable
Securities) shall not be counted in determining whether such consent or
approval was given by the Holders of such required percentage.
7.07: NOTICE. Any notices or certificates by the Company to the Holder
and by the Holder to the Company shall be deemed delivered if in writing and
delivered in person or by registered mail (return receipt requested) to the
Holder addressed to him in care of CIBC Oppenheimer Corp., CIBC Oppenheimer
Tower, One World Financial Center, New York, New York 10281 or, if the Holder
has designated, by notice in writing to the Company, any other address, to
such other address, and if to the Company, addressed to it at its
headquarters.
IN WITNESS WHEREOF, this Warrant has been duly executed by the Company
under its corporate seal as of the ___ day of February, 1998.
PHARMAPRINT INC.
By: ________________________________
Name:
Title:
<PAGE>
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificate)
For value received, _________________ hereby sells, assigns and
transfers unto __________ the within Warrant Certificate, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint attorney, to transfer said Warrant Certificate on the books of the
within-named Company with respect to the number of Warrants set forth below,
with full power of substitution in the premises:
NAME(S) OF
ASSIGNEES(S) ADDRESS NO. OF WARRANTS
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
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And if said number of Warrants shall not be all the Warrants represented
by the Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said undersigned for the balance remaining of the Warrants
represented by said Warrant Certificate.
Dated: ___________________
_______________________________________
NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME ON THE FACE
OF THIS WARRANT CERTIFICATE.
<PAGE>
SUBSCRIPTION FORM
(TO BE EXECUTED UPON EXERCISE OF WARRANT
PURSUANT TO SECTION 2.02(a)(i))
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder ________________ shares of Common Stock, and tenders herewith
payment of the purchase price in full in the form of cash or a certified or
official bank check in the amount of $________________.
Please issue a certificate or certificates for such Common Stock in the
name of:
Name: ________________________________
(Please Address and Social Security
Number below)
Signature: ___________________________
Date: ________________________________
NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME ON THE FACE
OF THIS WARRANT CERTIFICATE OR WITH THE NAME OF THE ASSIGNEE APPEARING IN THE
ASSIGNMENT FORM BELOW.
If the number of shares are not be all the shares exchangeable or
purchasable under the within Warrant Certificate, a new Warrant Certificate
is to be issued in the name of the undersigned for the balance remaining of
the shares purchasable rounded up to the next higher number of shares.
<PAGE>
CASHLESS EXERCISE FORM
(TO BE EXECUTED UPON EXERCISE OF WARRANT
PURSUANT TO SECTION 2.02(a)(ii))
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder, _______ shares of Common Stock, pursuant to the Cashless Exercise
provisions of the Warrant Certificate, as provided for in Section 2.02(a)(ii)
of such Warrant Certificate.
Please issue a certificate or certificates for such Common Stock in the
name of:
Name:___________________________________
(Please print Address and Social
Security Number below)
Signature:______________________________
Date:___________________________________
NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME ON THE FACE
OF THIS WARRANT CERTIFICATE OR WITH THE NAME OF THE ASSIGNEE APPEARING IN THE
ASSIGNMENT FORM BELOW.
If the number of shares are not be all the shares exchangeable or
purchasable under the within Warrant Certificate, a new Warrant Certificate
is to be issued in the name of the undersigned for the balance remaining of
the shares purchasable rounded up to the next higher number of shares.
<PAGE>
Exhibit 5.1
February __, 1998
PharmaPrint Inc.
4 Park Plaza, Suite 1900
Irvine, CA 92614
Gentlemen:
As counsel to PharmaPrint Inc., a Delaware corporation (the "Company"),
we have assisted in the preparation of the Company's Registration Statement
on Form SB-2 (File No. 33-41129) (the Registration Statement as amended at
the time it became effective being referred to as the "Registration
Statement") filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Securities Act"), covering 1,725,000
shares of the Company's common stock, par value $.001 per share (the "Common
Stock"), comprised of (i) 1,500,000 shares of Common Stock to be sold by the
Company (the "Shares") to the underwriters for whom CIBC Oppenheimer Corp. is
acting as representative (the "Underwriter") and (ii) up to 225,000 shares
of Common Stock (the "Optional Shares") which the Underwriters will have a
right to purchase from the Company to cover over-allotments, if any.
In connection therewith, we have examined the originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Company's
Certificate of Incorporation and Bylaws, as amended through the date hereof;
(ii) minutes and resolutions of the Company's Board of Directors and
stockholders; (iii) certificates issued by public officials; and (iv) such
other documents and
<PAGE>
PharmaPrint Inc.
February __, 1998
Page 2
corporate records relating to the Company and the issuance and sale of the
Shares and Optional Shares as we have deemed necessary as a basis for the
opinion hereinafter set forth.
In our examination of the foregoing documents, we have assumed: (i) the
genuineness of all signatures on originals and certified copies of documents;
and (ii) the authenticity of all documents submitted to us as originals as
well as the conformity to the originals of all documents submitted to us as
photostatic copies. As to any fact material to our opinion, we have relied,
to the extent we deem such reliance proper, upon representations of officers
of the Company.
Based upon the foregoing, we are of the opinion that the Shares and the
Optional Shares to be sold to the Underwriters, when issued and sold in
accordance with and in the manner described in the plan of distribution set
forth in the Registration Statement, will be duly authorized, validly issued,
fully paid and non assessable.
We are members of the Bar of the Supreme Court of Pennsylvania and do
not opine as to the laws of any jurisdiction other than Pennsylvania and the
General Corporation Law of the State of Delaware; provided, however, that no
opinion is hereby rendered as to the state securities laws of either the
Commonwealth of Pennsylvania or the State of Delaware. We hereby consent to
the reference to our firm in the Registration Statement under the prospectus
caption "Legal Matters" and to the inclusion of this opinion as an exhibit to
the Registration Statement. In giving such consent, we do not admit hereby
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act, or the rules and regulations promulgated
thereunder.
Very truly yours,
